Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections

Context matters

“…We view our proxies as indicative of audit quality since audited financial statements are a joint product of clients and auditors (Antle & Nalebuff [1991]) and the ultimate goal of the auditor is to increase the reliability of financial reporting (DeFond & Zhang [2014]). This view is consistent with recent empirical evidence showing that commonly used financial reporting quality measures are correlated with audit process quality (Aobdia [2019]).…”

“…However, financial reporting quality is a joint product of clients and auditors (Antle and Nalebuff [1991]), and the goal of auditors is to increase financial statement reliability (DeFond and Zhang [2014]). In addition, these publicly available measures of financial reporting quality are generally associated with practitioner assessments of audit quality (Aobdia [2019]). Specifically, as a measure of earnings management, we use the absolute value of total accruals (|TA|) and control for all regressors of the performance-adjusted Jones model and their interactions with industryyears in our audit quality model (equation [2]).…”

IQ and Audit Quality: Do Smarter Auditors Deliver Better Audits?

“…Audit fees can proxy for audit effort and quality. Consistent with this view, prior studies find a high correlation between audit hours and audit fees, as well as a positive association between audit hours, audit fees, and financial reporting quality (e.g., Lobo and Zhao 2013;Aobdia 2019). However, audit fees could also measure a partner's ability to sell audit services.…”

Do Client Bankruptcies Preceded by Clean Audit Opinions Damage Auditor Reputation?*

“…First, restatements are considered a direct and egregious measure of low audit quality capturing auditor error (DeFond and Zhang , 284; Francis and Michas ). Christensen et al (, 1651) document that “auditors and investors view restatements as the most readily available public signal of low audit quality.” Aobdia () documents that restatements demonstrate statistically significant associations with auditor and regulator assessments of audit deficiencies. Second, previous auditor reputation studies document a negative reputation effect of restatements realized by an audit firm's clients, consistent with the role of restatements as negative AQIs (Irani et al ; Swanquist and Whited ) .…”

“…Given the limited evidence of any stakeholder response, I consider a second research question: should stakeholders respond to Type II GCO errors? To address this question, I examine the association between Type II GCO errors and restatements, an established measure of low audit quality (Aobdia ; Christensen et al ; DeFond and Zhang ; Francis and Michas ; Irani et al ; Swanquist and Whited ). I model the probability of subsequent restatement at the company‐year level as a function of an audit office's Type II GCO errors (Eshleman and Guo ).…”