The effect of size and type of auditor on audit quality

This study aims to investigate whether or not audit quality is influenced by auditor type (governmental vs. private auditors) and by auditor size (Big auditors vs. non-Big auditors). A sample of 2241 firm-year observations from Tehran Stock Exchange (TSE) companies during the period 2002 to 2007 is used. Discretionary accruals (DAC) is employed as representative of audit quality. The cross-sectional version of Jones' model modified by Kothari, et al. (2005) is applied to measure DAC. Results show that financial statements audited by governmental auditors contain smaller discretionary accruals than those audited by private audit firms do. Furthermore, a change from governmental auditor to private auditors is associated with larger discretionary accruals, suggesting that governmental auditors provide superior audits. Finally, the size of non-governmental audit firms does not affect their audit quality, and changes within private audit firms do not lead to changes in the level of discretionary accruals. The empirical results imply that in some settings such as Iran’s, factors including auditor type, intense competition, audit committee, and litigation risk are of greater importance than auditor size. This paper shed new light on the comparison of audit quality between governmental and private audit firms.