IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Audit-Firm Portfolio Characteristics and Client Financial Reporting Quality

Listed author(s):
  • Ann Gaeremynck
  • Sofie Van Der Meulen
  • Marleen Willekens
Registered author(s):

    This paper contributes to the audit quality literature by defining continuous measures of expected future audit-firm losses and testing their association with proxies of financial reporting quality. In prior studies audit-firm size has been used as a proxy for expected future audit-firm losses and hence - following theoretical arguments in DeAngelo (Journal of Accounting and Economics, 3(3), pp. 183-199, 1981) and Dye (Journal of Political Economy, 101(5), pp. 887-914, 1993) - for audit quality. In particular, the Big 8/6/5/4 indicator variable has been tested empirically against various measures of client financial reporting quality. In this paper, we focus on testing various characteristics of an audit firm's client portfolio as drivers of audit quality (and therefore subsequently also client financial reporting quality), including measures to proxy size, visibility and financial health characteristics of an audit-firm portfolio. We test both a disclosure and earnings quality model for that purpose, and find for a sample of Belgian companies in financial distress, that audit-firm portfolio characteristics better explain variations in client financial reporting quality than the traditionally used Big N indicator variable. In particular, we find that - ceteris paribus - the size of an audit-firm portfolio is irrelevant in explaining the variation in financial reporting quality amongst companies. Next, we find that client visibility characteristics of an audit-firm portfolio have a constraining impact on earnings management, but no impact on the disclosure quality in the notes. Third, we find that solvency characteristics of an audit-firm portfolio (but not liquidity and profitability characteristics), are positively associated with the financial reporting quality. Taken together, the evidence suggests that not so much the size of an audit-firm portfolio (and the audit firm) but other portfolio and client characteristics drive audit and financial reporting quality.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 17 (2008)
    Issue (Month): 2 ()
    Pages: 243-270

    in new window

    Handle: RePEc:taf:euract:v:17:y:2008:i:2:p:243-270
    DOI: 10.1080/09638180701705932
    Contact details of provider: Web page:

    Order Information: Web:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:taf:euract:v:17:y:2008:i:2:p:243-270. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.