An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Bruce Behn
University of Tennessee

Jonghag Choi
Hong Kong University of Science and Technology

Tony Kang
Singapore Management University

Young Kwon
Singapore Management University

Abstract: In this study, we formulate a theoretical relationship between audit quality and earnings predictability by financial analysts. The underlying logic of this model is that audit quality is positively related to financial information quality and that the financial information quality affects properties of analysts’ earnings forecasts. We then provide empirical evidence that is consistent with the model’s theoretical implications. We find that: (1) forecast accuracy is higher, (2) forecast dispersion is smaller, and (3) the tendency for firms to beat / meet forecasts is lower for firms audited by a Big Five auditor. Further, we find that auditor expertise (i.e., industry specialization) has a greater impact on forecast accuracy when the firm is audited by a non-Big Five auditor. Overall, our empirical evidence is generally consistent with the assertion that audit quality facilitates analysts’ task of earnings prediction.

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