The Effect of Audit Quality  on Financial Reporting Quality

Mesabah, Salma Hisham; Ramadan, Maha Mohamed

doi:10.21608/aljalexu.2022.253523

The Effect of Audit Quality on Financial Reporting Quality

Document Type : Original Article

Authors

¹ Master of Science Student at Arab Academy for science, technology, and maritime transport, Faculty of management and technology

² Associate Professor of Accounting Eslsca University Egypt and Alexandria University Faculty of Commerce

10.21608/aljalexu.2022.253523

Abstract

This study examines the effect of audit quality on financial reporting quality. It contributes to current accounting and auditing literature by providing empirical evidence on the effect of different audit quality proxies on financial reporting quality. Audit firm fees, audit firm tenure and audit firm size are used as proxies for audit quality. On the other hand, earnings management and accounting conservatism are used as proxies for financial reporting quality. These variables were measured using secondary data obtained from the financial statements of 152 firms listed in the Egyptian stock market in the period from 2016 to 2020 representing 608 firm-year observations, excluding non-financial firms due to their special nature. Results provided evidence of a positive relationship between audit firm size and audit firm fees on one hand and financial reporting quality on the other. However, results showed a negative relationship between audit firm tenure and financial reporting quality. These results provide evidence that financial statement users can trust the financial reports audited by Big 4 audit firms more than the financial reports audited by non-Big 4 audit firms. This provides implications for standard setters to focus more on the audit quality performed by non-Big 4 audit firms. Additionally the results provided implications for standard setters to control the audit firm tenure so as not to exceed 3 years, to maintain the high financial reporting quality.

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