Big N auditors and the quality of earnings: Evidence from Middle Eastern and North African countries

Abstract

In recent years, the importance of audit quality has garnered significant attention by managements, academics and the general public. In this study, we examine the relationship between Big N auditors and earnings quality in the Middle Eastern and North African (MENA) countries, where cultural and institutional contexts are quite different from those in Western countries. In addressing this issue, we employ three audit quality metrics – value relevance, abnormal accruals and earnings persistence – and use the propensity score matching technique to deal with the potential endogeneity arising from the nature of external auditor choices. Contrary to the view that Big N auditors supply quality-differentiated audits, the results obtained employing a cross-country sample of publicly listed non-financial firms of 10 MENA countries during 2009–2019 provide evidence that Big N auditors are insignificantly associated with the three measures of audit quality. Furthermore, we find that the differences in audit quality between the two auditor groups are mainly due to the clients’ innate characteristics, rather than the competency of Big N auditors. Our results hold after performing different sensitivity analyses. Overall, our findings challenge the conventional notion that Big N auditors deliver quality-differentiated audits.