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Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: The impact of audit quality on earnings predictability
Author(s): Hussainey, Khaled
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Keywords: Audit quality
Financial statements
Corporation reports
Issue Date: 2009
Date Deposited: 14-Jul-2010
Citation: Hussainey K (2009) The impact of audit quality on earnings predictability. Managerial Auditing Journal, 24 (4), pp. 340-351.;
Abstract: Purpose – This paper examines the impact of audit quality, measured by financial statements audited by the big four accounting firms, on the investors' ability to predict future earnings for profitable and unprofitable firms. Methodology – The paper uses the returns-earnings regression model developed by Collins et al. (1994) and the author interacts all independent variables in this model with a dummy variable, AUDIT, which is set to equal one if financial statements audited by the big four accounting firms, zero otherwise. Future Earnings Response Coefficient (FERC) is the measure of earnings predictability. Findings – The paper finds that investors are able to better anticipate future earnings when financial statements are audited by the big four accounting firms. However, the findings are not applicable for unprofitable firms. Practical implications – The findings of the paper have implications for auditing related academic research and the users of financial statements. In particular, the study shows that the big four accounting firms have not lost their audit quality advantage and that financial statements audited by the big four accounting firms are arguably of higher quality than those audited by non-big four accounting firms. Originality/value - To the best of the author’s knowledge, there is no UK study to date examining the association of the quality of financial statements audited by the big four accounting firms and the returns-earnings association. Consequently, this paper significantly contributes to the limited literature on the perceived value relevance of audit quality.
DOI Link: 10.1108/02686900910948189
Rights: Published in Managerial Auditing Journal by Emerald Group Publishing Limited.

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