Determinants of audit quality in Philippine audit firms: An earnings management approach

• Main Authors: Banares, Jamielyn Anne, Kho, Sarah Grace R., Tan, Maybelle Blaine Ocampo, Torres, Angelica Christine F.
• Format: text
• Language: English
• Published: Animo Repository 2008
• Subjects: Auditing > Quality control > Standards > Philippines; Accounting > Quality control > Standards > Philippines; Accounting
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14128
• Institution: De La Salle University

This paper examines the relationship between audit quality and several audit firm-specific characteristics using univariate econometric analyses. With performance-matched modified Jones discretionary accruals as a measure of earnings management, which in turn, is an indirect proxy for audit quality, we determine the direction and degree of effect of audit firm size, compensation, industry specialization and tenure on audit quality, and verify whether this effect varies across alternative model specifications and sample variations. We estimate this model for a sample of 68 corporations listed in the Philippine Stock Exchange for 2005 to 2007 using the Generalized Least Squares technique. We find that bigger audit firms are associated with overstated earnings reports, as do higher compensation. However, the relative amount of audit fees from the client, rather than the absolute, is a stronger determinant of audit quality, and we find that audit quality actually heightens the more important the client is a source of revenue for the firm. Industry-specializing audit firms are more effective in constraining the overstatement, but not the understatement of earnings. Finally, longer auditor tenure induces the audit firm to be biased in favor of higher income for the client."