Audit Firm Governance: Do Transparency Reports Reveal Audit Quality?
Abstract
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This paper investigates whether the quality of disclosures on audit firm governance contained in audit firm transparency reports is associated with audit quality. As a result of legal and regulatory requirements, audit firms in certain jurisdictions have recently started to issue transparency reports containing information on audit firm governance. We examine whether audit firms use transparency reports as a tool to compete on quality, and whether these disclosures are associated with actual audit quality. Based on a sample of transparency reports of 103 audit firms in a number of EU countries, we find that there is variation in the extent and type of disclosures across audit firms, but we do not find that the disclosures are associated with actual audit quality measured by the level of abnormal accruals of listed clients in audit firms’ portfolios. Overall, our findings suggest that transparency reports are not merely a fulfillment of minimum legal disclosure requirements but that the quality of current transparency report disclosures does not seem to reveal audit quality based on widely used measurable outputs of audit quality. |
| Contact information: |
| Paolo Perego |
