Evaluation of Audit Quality Based on Financial Statement Information

Abstract

The primary objective of this paper is to provide empirical evidence on

how financial statements audited by Big-Six auditors convey better

information than those audited by non-Big Six auditors to two groups

of users: security analysts and investors. Earnings forecast errors, the

dispersion of earnings forecasts, and the magnitude of earnings

response coefficients are used as surrogates for the quality of financial

statement information.

Security analysts significantly improve their accuracy and reach a

higher degree of consensus in their earnings forecasts after firms switch

their auditors from non-Big Six to Big Six accounting firms, compared

to switches within the same class (i.e., from a Big Six [non-Big Six] to a

different Big Six [non-Big Six]). Around the auditor switching years, the

magnitude of earnings response coefficients also increases significantly

for firms which switch their auditors from a non-Big Six to a Big Six

firm, compared to those which switch their auditors within the same

class. Overall, Big Six auditors seem to provide higher audit quality of

financial statements, which is consistent with premises adopted by

previous studies.