Abstract

The monitoring role of institutional ownership and its effect on audit quality attracts research interest (Lim et al., 2013; Zhong et al., 2017). The UK market, a well acknowledged market with a stringent regulatory environment and significant institutional investor base attracted our interest. The purpose of this study is to ascertain the role of institutional investors on audit quality, in a UK setting.

We adopt the auditor’s opinion (modified vs unmodified) metric as a proxy for audit quality. Our empirical results suggest the beneficial role of institutional investors in audit quality. We also document some important observations for distinctive variables that shape the auditor/client relationship, namely audit fees, auditor tenure and size. Audit fees reflect auditor effort and are associated with improved audit quality. However, increased audit fees are not interpreted in the same vein from institutional investors. The latter are probably concerned over loss of independence. The different perspective of investors is also witnessed in the case of tenure. While tenure is associated with improved quality for the whole sample, when institutional ownership is taken into consideration the conclusion is interpreted contradictory. Finally, auditor size does not seem to boost audit quality levels.

The empirical results add on the growing body of literature on audit quality determinants. Simultaneously, they complement research for the UK market which receives relative inattention considering its magnitude in world capital markets.

JEL Classification: M41, M42