Effect of Audit Quality on Earnings Quality Given Firm`s Operational Characteristics: An Empirical Study on Companies Listed on the Egyptian Stock Exchange

Document Type : Original Article

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Accounting Department Faculty of Commerce Alexandria University Alexandria Egypt

Abstract

This study examined the interrelation between audit quality and earnings quality given different operational characteristics. I investigate the impact of certain audit quality proxies on earnings quality indicators for a sample of 74 listed Egyptian firms during the period from 2011-2016. Research hypotheses are premised on the widely held belief that auditing quality is a value driver for financial reporting quality, and thus, predict a positive significant association between audit quality proxies and earnings quality indicators. 
Two measures were selected to assess audit quality; audit firm size and market-to-book ratio MTB. For earnings quality, three accounting-based measures were selected; persistence, predictability, and smoothness. The research predicts a positive significant association between audit quality indicators and earnings quality proxies.   
The results reveal that audit firm size is positively and significantly associated with earnings persistence. This is not true for predictability and smoothness. Moreover, evidence does not lend credence to the hypothesis predicting a positive association between MTB and earnings quality proxies. Sensitivity and additional analyses, further, support results of fundamental analysis.

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