Abstract
During the recent years, the accounting scandals have multiplied (Enron, World com, Xerox,...). Several factors have contributed to these scandals. Among these factors we find the quality of audit. This paper examines the impact of audit quality on earning quality. Audit quality is measured by financial statements audited by the Big 4 accounting firms. Earning quality is measured by the investors' ability to predict future earnings for profitable and unprofitable firms. We use a sample of around 4,417 firm-year observations in the U.K. market for the period 1996-2002. We document evidence 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.
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