The Effect of Auditor Type on Audit Quality: An Empirical Analysis

Abstract

Purpose Although a number of studies suggest that big audit firms provide higher audit quality in strict legal environments, empirical evidence remains inconclusive. Since little is known about the effect of auditor type on audit quality in less strictly legal environments, this study aims to investigate the impact of auditor type on audit quality in the Egyptian market. Design/methodology/approach Data of Egyptian-listed companies during the period 2011-2018 are employed. To examine the impact of auditor type on audit quality, ordinary least square regression and robust standard errors clustered at year and industry level are used. This study employs discretionary accruals as a proxy for audit quality. Several additional analyses are conducted to assess the robustness of the main results, including alternative measures of audit quality and auditor type. Findings Our results show that audit firms tend to provide higher audit quality when they are affiliated with a foreign audit firm. However, Big 4 auditors do not provide higher audit quality compare to their counterparts. Additionally, the governmental agency, Accountability State Authority (ASA), that monopolize audit function in state-owned companies do not appear to be associated with higher audit quality. Lastly, local audit firms have a negative association with audit quality. This may be their strategy to secure future clients that seek low-quality audits. Originality/value This study adds to the rare but growing body of literature by investigating how auditor type affects audit quality in the context of less strictly legal environments. Our results are important since investors, standards-setters and regulators have growing concerns over audit quality since the Enron scandal. The findings suggest that audit quality depends on auditor type. These findings have important implications for investors, standards-setters and auditors interested in auditor oversight, audit quality and auditor choice. Keywords: Audit quality, Big 4, Second-tier auditors, Third tier auditors, Local audit firms, Accountability State Authority JEL Classification M42