Authors: Georgios Simitsis, Maria Kyriakou
Title: Audit Attributes and their Effects on Audit Quality. Evidence from the UK.
Abstract
Market participants and regulators urge for incremented audit quality. Recent shortfalls in auditor’s work caused several interventions in the auditor market and motivated empirical research on audit quality. The Financial Reporting Council, the UK audit supervisory body, proposed an “Audit Quality Framework” (2008). Similarly, the International Auditing and Assurance Standards Board suggested a comprehensive “Framework for Audit Quality” (2014). Lastly, the European Union imparted the recommendations accrued from the Green Paper “Audit Policy: Lessons from the Crisis” to a legislative text (EC, 2010). Regulation 537/2014 describes thoroughly specific requirements regarding the statutory audit of public interest entities.
This study assesses the impact of audit attributes to audit quality in the UK market. The UK, even after the EU withdrawal, remains a vital financial market in the world’s financial system. Numerous listings under different sectors provide the ideal framework for empirical research since the UK market encompasses a mosaic of different company characteristics. At the same time, it is considered as a well-developed market with vigilant regulators.
In this context, audit quality is evaluated for a period covering the years 2010 to 2020. Two are the main drivers of our study. Firstly, the UK market remains popular and attracts academic, as well as the finance industry, interest. Secondly, our research is motivated by recent regulatory interventions. The conclusions could serve as a benchmark for the effectiveness of regulatory interventions.
Since quality, by virtue, is not directly observable, it can be approximated by different proxies. An insightful literature review on the issue is provided by DeFond and Zhang (2014). The most popular accounting measure of financial reporting quality is the Discretionary Accrual Model (DAC) suggested initially by Jones (1991) and further elaborated by Dechow et al. (1995). These models assess financial reporting quality and, indirectly, audit quality. Therefore, they are employed in the current research framework. Simultaneously, three audit attributes are identified, namely auditor size, auditor tenure and audit fee. Several control variables are introduced in the analysis. These are related to earnings outcome, the level of operating cash flow and corporate governance indicators. These variables aim to capture their significance on audit quality and elucidate auditor attributes effects on audit quality.
Our results indicate the statistical importance of the established auditor attributes, and especially auditor’s fee and size. Notably, corporate governance structures gain importance. All finance originated control variables are also significant, justifying their inclusion in the estimation procedure.
This study contributes to a vivid discussion on audit quality features and determinants. Empirical results should be carefully elaborated by market participants and regulators. It also paves the way to further enhance the estimation procedure on the drivers of audit quality.
