Big N auditors and the quality of earnings: Evidence from Middle Eastern and North African countries

Abstract

In recent years, the importance of audit quality has garnered significant attention by managements, academics and the general public. In this study, we examine the relationship between Big N auditors and earnings quality in the Middle Eastern and North African (MENA) countries, where cultural and institutional contexts are quite different from those in Western countries. In addressing this issue, we employ three audit quality metrics – value relevance, abnormal accruals and earnings persistence – and use the propensity score matching technique to deal with the potential endogeneity arising from the nature of external auditor choices. Contrary to the view that Big N auditors supply quality-differentiated audits, the results obtained employing a cross-country sample of publicly listed non-financial firms of 10 MENA countries during 2009–2019 provide evidence that Big N auditors are insignificantly associated with the three measures of audit quality. Furthermore, we find that the differences in audit quality between the two auditor groups are mainly due to the clients’ innate characteristics, rather than the competency of Big N auditors. Our results hold after performing different sensitivity analyses. Overall, our findings challenge the conventional notion that Big N auditors deliver quality-differentiated audits.

The Audit Quality and the Cessation of the Activity of the Companies

“…In the study by Al-Hiyari, Colsey, and Muqattash (2022), it is shown that, in the Middle Eastern context, auditors of the largest audit firms are not associated with audit quality, also measured by abnormal accruals, and that audit quality between large and smaller audit firms is associated with the type of clientele rather than the competence of the auditors.…”

Do audit attributes impact earnings quality? Evidence from India

“…As in the present time, several corporate financial frauds have disappointed various stakeholders and attracted the attention of policy-makers and researchers to multiple domains to highlight some unobservable facts and relationships that may be useful to control managerial EM practices. Further, such financial scandals also challenged the quality and independence of the external auditor (Abu Afifa et al ., 2021; Al-Hiyari et al ., 2022; Houqe et al ., 2017).…”

“…Contemporary high-profile (Big-4) audit firms failed to play their role sufficiently, which attracted all to their quality regarding audit work (Al-Hiyari et al ., 2022; Alzoubi, 2016; Awuye, 2022; Houqe et al ., 2017). Joint auditors (JAs) expand the reliability of financial reporting, reduce information asymmetry and lower the cost of capital (Barghathi et al ., 2020; Garcia-Blandon et al ., 2021).…”