The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World
46 Pages Posted: 8 Sep 2006
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The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World
The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World
Date Written: September 7, 2006
Abstract
The association of a country's investor protection regime with the quality of reported earnings is examined for a large sample of firms from 42 countries. Three attributes of earnings are evaluated: the magnitude of abnormal accruals, the likelihood of reporting losses, and earnings conservatism (timely loss recognition). We find that earnings quality increases for firms with Big 4 auditors when a country's investor protection regime gives stronger protection to investors; specifically, abnormal accruals are smaller, there is a greater likelihood of reporting losses, and earnings conservatism is greater. In contrast, earnings of firms with non-Big 4 auditors are largely unaffected by different investor protection regimes. The study adds to a growing body of research showing that accounting practices are influenced by a country's institutions. However, our results differ from prior studies by demonstrating that country-level effects are mediated by audit enforcement, and in particular the incentives of Big 4 auditors to perform higher quality audits in countries with stricter investor protection regimes.
Keywords: Big 4 auditors, investor protection, earnings quality, accounting conservatism, abnormal accruals, earnings management
JEL Classification: G38, K22, M49, M41, M43, M47
Suggested Citation: Suggested Citation
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