U.C.L. Institut de Statistique Discussion Paper 0135
Companies generate financial statements that are used for decision making by various stakeholders and the quality of those financial statements depends on the quality of the external auditor. There exists empirical evidence of quality differentiation between audit firms, but the audit-quality proxy that is typically used, auditor size (big 6 / non-big 6 firm), is very rough. The major purpose and contribution of this paper is to further investigate audit-quality determinants empirically. To that end we test the impact on financial statement and audit quality of audit-firm portfolio characteristics, that we selected based on a well-perceived theory by DeAngelo (1981). We indeed find that audit-firm portfolio characteristics better explain variations in financial statement and audit quality. In particular: 1) the short-term leverage of an audit firm's portfolio is negatively, and 2) the number of clients in an audit firm's portfolio is positively associated with financial statement and audit quality.