Accounting comparability, audit effort and audit outcomes
The paper investigates the usefulness of accounting comparability for audit engagement. Comparability among peer firms in the same industry reflects the similarity and the relatedness of firms’ operating environment and accounting reporting. From two perspectives of “inherent business risk” and “external information efficiency”, comparability is helpful for auditors to assess client business risk and lowers the cost of information acquisition, processing, and testing. For a given firm, I hypothesize that the availability of information about comparable firms is helpful for auditors by improving audit accuracy and audit efficiency. The comparability proxy is based on a variety of measures including pair-wise earnings-return similarity (De Franco, Kothari and Verdi 2011), historical covariance of stock returns and cash flows, and earnings comparability controlling accounting choice differences. The empirical results show that accounting comparability is positively associated with audit quality and audit reporting accuracy as of a clean or a going-concern opinion. Meanwhile, comparability is negatively related to audit delay, audit fees, and the likelihood of auditor’s issuing a going-concern opinion. In totality, the study shows that industry-wise comparability enhances the utility of accounting information for external audit.
Audit Efficiency, Audit Quality, Audit Opinion Accuracy
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