What do we know about audit quality

By Jere R. Francis. 2004

1,286 citations recorded by the source corpus.

Abstract This paper reviews empirical research over the past 25 years, mainly from the United States, in order to assess what we currently know about audit quality with respect to publicly listed companies. The evidence indicates that outright audit failure rates are infrequent, far less than 1% annually, and audit fees are quite small, less than 0.1% of aggregate client sales. This suggests there may be an acceptable level of audit quality at a relatively low cost. There is also evidence of voluntary differential audit quality (above the legal minimum) along a number of dimensions such as firm size, industry specialization, office characteristics, and cross-country differences in legal systems and auditor liability exposure. The evidence is very positive although there is some indication that audit quality may have declined in the 1990s, in which case there could be merit in recent reforms such as the Sarbanes-Oxley Act of 2002 in the US. However, we do not know from research the optimal level of audit quality and therefore whether we currently have ‘too little’ or ‘too much’ auditing? Despite this lacuna we are entering an era of more mandated auditing in response to high-profile corporate governance failures including the Enron–Andersen affair. Finally, while recent reforms have scaled back the scope of non-audit services due to independence concerns, a case can be made that audit quality will always be somewhat suspect if other services are provided that are perceived to potentially compromise the auditor's objectivity and skepticism. For this reason public confidence in audit quality may be increased by proscribing all non-audit services for audit clients. Recommendations are also proposed with respect to legal liability reform and changes in partner compensation arrangements.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/9542e26f7dc3a5806b06b515e6086d7194f64966

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Citations in the corpus

Different approaches to corporate reporting regulation: How jurisdictions differ and why (2010, background): “Private enforcement mechanisms, such as shareholder litigation, rely heavily on the availability 11 An obvious exception is the large literature on auditing (see, e.g., the surveys by Francis, 2004; DeFond and Francis, 2005).”
Customer satisfaction, corporate image, and service quality in professional services (2010, background): “) about how credible the audited financial information is (Francis, 2004).”
An empirical test of spatial competition in the audit market (2012, background): “For a thorough review of the audit quality literature, see Francis (2004).”
Voluntary Audits Versus Mandatory Audits (2011, background): “…the U.K. and elsewhere suggest that the Big 4 firms supply higher-quality audits than do smaller auditors (e.g., Lennox 1999; Peel and Roberts 2003; Francis 2004; McMeeking et al. 2006), although the evidence is more mixed for private companies (Vander Bauwhede and Willekens 2004; Fortin and…”
Transparency and Liquidity Uncertainty in Crisis Periods (2011, background): “14 Another alternative measure in Goyenko et al. (2009) is the Amivest measure based on the ratio of trading volume to the absolute value of returns.”
Auditor Choice in Politically Connected Firms (2014, neutral): “The Big Four market share in our sample is slightly higher than the 71% reported in Choi and Wong (2007) for a sample of public firms from 39 countries for the period 1993 to 1998 and the 74% reported in Francis and Wang (2008) for a sample of firms from 42 countries for the period 1994 to 2004.”
An Examination of the Credence Attributes of an Audit (2012, background): “However, audit failures are rare and may under-represent the actual audit failure rate (Francis 2004).”
Internal audit involvement in Enterprise Risk Management (2011, background): “The external auditor was described as being from a top-tier firm to denote quality (Francis, 2004).”
Auditor Style and Financial Statement Comparability (2014, neutral): “Francis (2004, 2011) reviews the empirical auditing literature and describes auditor characteristics associated with earnings quality, including the Big 4/non-Big 4 dichotomy, the auditor’s industry expertise (Reichelt and Wang 2010), and engagement-specific factors such as client size (Reynolds…”
Does Corporate Transparency Contribute to Efficient Resource Allocation (2009, positive): “12 Prior research shows that the international Big 6 firms accounting perform higher quality audits on average than smaller accounting firms (Francis 2004; Watkins et al. 2005).”
The Role of Bank Reputation in “Certifying” Future Performance Implications of Borrowers’ Accounting Numbers (2012, neutral): “6 Gopalan et al. (2009) show that default by a lead arranger's borrower adversely affects subsequent lending activity consistent with a loss of reputation.”
Assessing France's Joint Audit Requirement: Are Two Heads Better than One? (2006, background): “A large body of empirical research mainly from Anglo-American countries supports the argument that the large international accounting firms provide qualitydifferentiated audits (Francis 2004; Watkins et al. 2004).”
Do IRS Audits Deter Corporate Tax Avoidance (2012, methodology): “We also measure GOVERNANCE with the presence of a Big 4 auditor, BIG FOUR, known to more tightly constrain managers’ discretion over the financial reporting process according to extensive prior research (Francis 2004).”
Do Industry-Specialist Auditors Influence Stock Price Crash Risk? (2015, neutral): “Concerning operating decisions, Godfrey and Hamilton (2005) and Francis et al. (2012) argue that high-quality auditors (e.”