Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective

Abstract

This paper investigates the joint effect of global financial crisis of 2008 and investor protection on audit quality and the joint effect of audit quality and investor protection on earnings quality among three clusters based on the country classification of Leuz (2010. Acc. Bus. Res. 40 (3), 229). The results are mixed among clusters and research periods. First, the results show that all measures of audit quality are positively associated with most institutional factors of investor protection in all clusters. Second, audit quality is lower during financial crisis in all clusters and in most of audit quality measures. Third, audit quality is higher (lower) for firms with strong (weak) investor protection and legal enforcement during financial crisis in all clusters. Fourth, we report that earnings quality is stronger (weaker) in countries with strong (weak) investor protection in all clusters before and during the crisis. Fifth, higher (lower) audit quality implies higher (lower) earnings quality in all clusters, irrespective of the financial crisis. Finally, higher (lower) audit quality implies higher (lower) earnings quality in countries with high (low) investor protection in all clusters, irrespective of the financial crisis.