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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Do Audit Firms’ Financial Statements Provide Information about Audit Quality?
AU - He, Shaohua
AU - Lisic, Ling Lei
AU - Tan, Liang
AU - Wang, K. Philip
PY - 2025/1/23
Y1 - 2025/1/23
N2 - Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency. JEL Classifications: M40; M42.
AB - Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency. JEL Classifications: M40; M42.
U2 - 10.2308/tar-2021-0527
DO - 10.2308/tar-2021-0527
M3 - Journal article
JO - The Accounting Review
JF - The Accounting Review
SN - 0001-4826
ER -