Audit Quality Inputs and Financial Statement Reliability

Abstract

Using Amiram, Bozanic, and Rouen’s (2015) measures of the conformity of a firm’s distribution of financial statement line items’ leading digits to the Benford distribution, we examine whether different constructs of audit quality inputs are related to financial statement reliability. Overall, we find that financial statement reliability increases with audit fees, non-audit fees, and audit report lag, and decreases with audit firm tenure. We also find that audit quality inputs are more strongly associated with income statement reliability than with cash flow statement reliability. In addition, we demonstrate that the impact of each audit quality input on overall financial statement reliability does not vary with audit firm size, defined as an audit firm’s Big 4 membership. Our results are robust to various alternative specifications of the dependent and the independent variables. Using a century-old measure that recently attracted interest, our findings corroborate the significant role that auditors play in enhancing the reliability of financial statements.