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SUMMARY
The association between auditor size and audit quality is examined for a sample of not-for-profit (NFP) entities. The audit quality measure is based on the entities' compliance with eight GAAP reporting requirements. The numbers on compliance supports policymakers' contention (prior to the recent issuance of three new statements) that reporting by NFPs was inconsistent. Of the eight reporting requirements examined, noncompliance is highest for those that pertain specifically to NFPs, for example, disclosures about pledges and donated materials. However, the extent of noncompliance decreases as one moves from the small non-Big 6 to the large non-Big 6 and from the large non-Big 6 to the then Big 6. This positive association between auditor size and audit quality is borne out in multivariate regression analyses, after controlling for other correlates of audit quality. Another measure of audit firm size, based on the number of professionals employed by the firm, further confirms this finding. In addition, the results indicate that there are other factors, i.e., client size, financial health, client wealth, and participation in a peer-review process, that impact audit quality.
Key Words: Audit quality, Not-for-profit organizations, Voluntary health and welfare organizations.
Data Availability: Data used in this study will be available from the second author upon completion of a subsequent research project.
INTRODUCTION
This study examines the association between audit firm size and audit quality in the context of an audit environment that has not been studied by prior work, that is, the not-for-profit (NFP) sector. The perception of a positive association between auditor size and audit quality has been a subject of concern for some time (e.g., National Commission on Fraudulent Financial Reporting 1987; AICPA 1993). While regulators (AICPA 1980) have maintained that audit quality is independent of firm size, accounting researchers (e.g., DeAngelo 198 lb) have argued that large accounting firms produce a higher quality audit than small accounting firms. Empirical work in auditing has generally assumed a positive association between audit quality and audit firm size, with firm size usually measured by the brand name of the auditor. Actual tests of the association have been hampered by the lack of observable measures of audit quality. Some studies use indirect measures such as audit fees or auditor litigation or users' perceptions...