Can audit quality predict earnings persistence? (early view)
Main Article Content
Abstract
Research on the impact of audit quality on earnings persistence is of interest to both managers, investors, and researchers, but does not yield consistent results. Therefore, this study aims to examine the link between these two factors with audit firm size as a measure of audit quality. We use quantitative analysis through the instrumental variables (IV) regression for a sample of 228 listed firms from 2014 to 2017 in the Vietnamese stock market. Our finding shows that audit quality has a positive effect on earnings persistence. This trend is also true for firm size and cash ratio, while debt ratio and firm age negatively impact earnings persistence. Our research contributes to the current literature by providing evidence for further studies in this field and proposes some viable solutions for functional government agencies, audit companies, and enterprise managers in improving the quality of auditing and information disclosed.
Downloads
Article Details

This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Abernathy, J. L., Kang, T., Krishnan, G. V., & Wang, C. (2018). Is there a relation between residual audit fees and analysts’ forecasts? Journal of Accounting, Auditing and Finance, 33(3), 299–323. https://doi.org/10.1177/0148558X16637963
Adegbie, F. F., Salawu, R. O., & Usifoh, O. O. (2020). Nigerian quoted manufacturing companies, (June).
Aguguom, A., & Salawu, R. (2018). Earnings quality and firms book value: An empirical evidence from the listed firms in Nigeria. Journal of Internet Banking and Commerce, 23, 1-23.
Aguguom, A., Dada, S., & Nwaobia, A. (2019). Earnings persistence and firm performance: Implications of analysts’ accurate forecast ability from the emerging market of Nigeria. International Journal of Digital Accounting Research, 7(1), 197-214.
Anwer, S.A., Rasmusen, S.J. and Senyo, Y.T. (2008), Evidence on audit quality differences across big N audit: The effect of using an industry specialist auditor on cost. Financial Accenting and Reporting Section (FARS) Paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013330
Arens, A., Randal, J., & Elder, M. (2014). Beasley-Auditing and Assurance Services. An Integrated Approach, 15th ed., Prentice Hall, Boston, MA.
Asbaugh, H., & Warfield, T., D., (2003). Audits as a corporate governance mechanism: Evidence from the German market. Journal of International Accounting Research, 2(1), 1-21.
Beaupain, R., & Joliet, R. (2011). Corporate drivers of market liquidity on the Warsaw stock exchange. International Economies, 125, 83–104.
Choi, J.-H., & Doogar, R. (2005). Auditor tenure and audit quality: evidence from going-concern qualification issued during 1996–2001, working paper, Seoul National University, Seoul.
Choi, J.-H., Kim, C., Kim, J.-B., & Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice & Theory, 29(1), 73-97. https://doi.org/10.2308/aud.2010.29.1.73
Choi, J.-H., Kim, J.-B., Qiu, A. & Zang, Y. (2007). Auditor locality, audit quality and audit pricing, working paper, Singapore Management University, Singapore
Choi, J.-H., Kim, J.-B., Qiu, A. & Zang, Y. (2010). Do abnormally high audit fees impair audit quality?, Auditing: A Journal of Practice & Theory, Vol. 29 No. 2, pp. 115-140.
Dang, H. N., Nguyen, T. T. C., & Tran, D. M. (2020). The impact of earnings quality on firm value: The case of Vietnam. Journal of Asian Finance, Economics and Business, 7(3), 63–72. https://doi.org/10.13106/jafeb.2020.vol7.no3.63
DeAngelo, L. E. (1981). Auditor size and audit fees. Journal of Accounting and Economics, 3(3), 183– 199.
Dechow, P., & Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(4), 35–59.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401. https://doi.org/10.1016/j.jacceco.2010.09.001
Delvira, M., & Nelvirita. (2013). Pengaruh Risiko Sistematik , Leverage Dan Persistensi Laba Terhadap Earnings Response Coefficient (ERC) (Studi pada Perusahaan Manufaktur yang Go Public di BEI Tahun 2008-2010). Jurnal WRA, 1(1), 129–154.
Deng, L., Li, S., & Liao, M. (2017). Dividends and earnings quality: Evidence from China. International Review of Economics and Finance, 48, 255–268. https://doi.org/10.1016/j.iref.2016.12.011
Diamond, D. and Verrecchia, R. (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, Vol. 46 No. 4, pp. 1325-59.
Di Fabio, C. (2019). Earnings quality and external governance on banks: Empirical evidence in the European context. International Journal of Accounting, Auditing and Performance Evaluation, 15(4), 410–431. https://doi.org/10.1504/IJAAPE.2019.106426
Do, N. H., Pham, N. V. T., Tran, D. M., & Le, T. T. (2020). Sustainable earnings and its forecast: The case of Vietnam. Journal of Asian Finance, Economics and Business, 7(3), 73–85. https://doi.org/10.13106/jafeb.2020.vol7.no3.73
Dyck, A. and Zingales, L. (2004). Private benefits of control: an international comparison, The Journal of Finance, Vol. 59, No. 2, pp.537–600.
Easley, D., & O’Hara, M. (2004), Information and the cost of capital. The Journal of Finance, Vol. 59, pp. 1553-83.
Eliwa, Y., Haslam, J., & Abraham, S. (2021). Earnings quality and analysts’ information environment: Evidence from the EU market. Journal of International Accounting, Auditing and Taxation, 42, 100373. https://doi.org/10.1016/J.INTACCAUDTAX.2020.100373
Fortin, S., & Pittman, J., A., (2007). The role of auditor choice in debt pricing in private firms. Contemporary Accounting Research, 24(3), 859-896.
Francis, J., R., (2004). What do we know about audit quality? The British Accounting Review, 36(1),345- 368.
Francis, J. R., & Yu, M. D. (2009). Big 4 office size and audit quality. The Accounting Review, 84(5), 1521–1552. https://doi.org/10.2308/accr.2009.84.5.1521
Freeman, R. E. (2015). Stakeholder theory. Wiley Encyclopedia of Management, 1–6. https://doi.org/10.1002/9781118785317.weom020179
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304- 405X(76)90026-X
Hai, P. T. (2016). The research of factors affecting the quality of audit activities: Empirical evidence in Vietnam. International Journal of Business and Management, 11(3), 83. https://doi.org/10.5539/ijbm.v11n3p83
Hang, N. T., Nguyen, T., & Tran, M. (2018). the Impact of Audit Quality and State Ownership on Earnings Management: Evidence From Vietnam, 108(108), 1–24.
Haw, I. M., Hu, B., Hwang, L. S., & Wu, W. (2004). Ultimate ownership, income management, and legal and extra-legal institutions. Journal of Accounting Research, 42(2), 423–462.
Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its. Accounting Horizons, 13(4), pp.365-383. Retrieved from http://www.aaajournals.org/doi/abs/10.2308/acch.1999.13.4.365
Houghton, K.A., Keith, A. & Ikin, C.C. (2001), Auditor provided non-audit services: modelling fees and willingness to buy, working paper, University of Melbourne and University of Tasmania, Melbourne.
Hribar, P., Kravet, T., & Wilson, R. (2014). A new measure of accounting quality. Review of Accounting Studies, 19, 506-538.
Hussainey, K. (2009). The impact of audit quality on earnings predictability. Managerial Auditing Journal, 24(4), 340–351. https://doi.org/10.1108/02686900910948189
Iana, M., P.,Paulo, R. &Edilson, P. (2013). The relationship between audit quality and accounting conservatism in Brazilian companies. Journal of Education and Research in Accounting. 7(3), 293- 314.
International Finance Corporation. (2012). Vietnam corporate governance scorecard (Third ed.). Pennsylvania: International Finance Corporation.
Gissel, J., Giacomino, D., & Akers, M. (2005). Earnings Quality: It’s Time to Measure and Report. The CPA Journal, 75(11).
Gul, F.A. (1989), Banker’s perceptions of factors affecting auditor independence, Accounting, Auditing and Accountability Journal, Vol. 2 No. 3, pp. 40-51.
Kang, T., Gopal, V., Krishnan, M., Wolfe, C., & Han, S., Y., (2012). The impact of eliminating the 20-F reconciliation requirement for IFRS filers on earnings persistence and information uncertainty. Accounting Horizons 26(1) 741–65.
Kheirollahi, F., Nazari, F., Rezaei, J., Nooraei, H., & Gholami, S., (2014). Survey of the relationship between audit quality and earnings quality. Indian Journal of Fundamental and Applied Life Sciences 4 (1) 952-961
Kim, J.-B., Chung, R. & Firth, M. (2003), Auditor conservatism, asymmetric monitoring and earnings management, Contemporary Accounting Research, Vol. 20 No. 2, pp. 323-359.
Leuz, C., Nanda, D. & Wysocki, P.D. (2003). Earnings management and investor protection: an international comparison, Journal of Financial Economics, Vol. 69, No. 3, pp.505–527.
Lev, B. (1988), Toward a theory of equitable and efficient accounting policy, The Accounting Review, March, pp. 1-22.
Li, F., (2008). Annual report readability, current earnings and earnings persistence. Journal of Accounting and Economics, 45(1)221-247.
Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. British Accounting Review, 51(4), 402–423. https://doi.org/10.1016/j.bar.2019.02.005
Lipe, R., (1990). The relation between stock returns and accounting earnings given alternative information. Accounting Review, 65(1), 49-71
Luo, J.H., Li, X., & Chen, H. (2018), Annual report readability and corporate agency costs, China Journal of Accounting Research, Vol. 11 No. 3, pp. 187-212.
Lys, T. & Watts, R.L. (1994), “Lawsuits against auditors”, Journal of Accounting Research, Vol. 32, pp. 65-93.
Machdar, N. D., Manurung, A., & Murwaningsari, E. (2017). The Effects of Earnings Quality, Conservatism, and Real Earnings Management on the Company’s Performance and Information Asymmetry as a Moderating Variable. International Journal of Economics and Financial Issues, 7(2), 309-318.
Mahmoud, M., & Zohre, T., (2014). Examining the earnings persistence and its components in explaining the future profitability. Interdisciplinary Journal of Contemporary Research in Business, 5 (10), 104-117.
Martins, O. S., & Barros, L. A. B. D. C. (2020). Firm Informativeness, Information Environment, and Accounting Quality in Emerging Countries. International Journal of Accounting. https://doi.org/10.1142/S1094406021500049
Ojeka, S., A., Iyoha, F., O., & Obigbemi, I., F., (2014). Effectiveness of audit committee and firm financial performance in Nigeria: An empirical analysis. Journal of Accounting and Auditing: Research & Practice 1(1),1-39. [41].
Ojeka, S., A., Iyoka, F., O. & Asaolu, T. (2015). Audit committee financial expertise: Antidote for financial reporting quality in Nigeria. Mediterranean Journal of Social Sciences.6 (1), 136-146.
Ohlson, J.A. (1980), Financial ratios and the probabilistic prediction of bankruptcy, Journal of Accounting Research, Vol. 18 No. 1, pp. 109-131.
Pham, N. K., Duong, H. N., Pham, T. Q., & Ho, N. T. T. (2017). Audit Firm Size, Audit Fee, Audit Reputation and Audit Quality: The Case of Listed Companies in Vietnam. Asian Journal of Finance & Accounting, 9(1), 429. https://doi.org/10.5296/ajfa.v9i1.10074
Phan, T. T. H., Lai, L. A., Le, T. T., Tran, D. M., & Tran, D. T. (2020). The impact of audit quality on performance of enterprises listed on Hanoi Stock Exchange. Management Science Letters, 10(1), 217–224. https://doi.org/10.5267/j.msl.2019.8.001
Qi, C., Subramanyam, K., & Zhang, J. (2010). Accrual quality, bond liquidity, and cost of debt. Working paper, University of Southern California.
Quang, T. (2013). Vietnam: An emerging economy at a crossroads. Working paper, Maastricht school of management, 2 May 2015.
Rajizadeh, S., &Rajizadeh, S., (2013). Examining the factors affecting earnings persistency among the listed firms in Tehran stock exchange. European Online Journal of Natural and Social Sciences 2(3), 2073-2079.
Ranasinghe, D., Mather, P., & Young, S. (2020). Board structure and earnings persistence: The mediation effect of board processes. Australian Journal of Management, 45(2), 266–293. https://doi.org/10.1177/0312896219851553
Rezaei, F., & Shabani, S. (2014). The effect of audit firm size and age on the quality of audit work. European Online Journal of Natural and Social Sciences, 3(1), 56–64. Retrieved from http://european-science.com/eojnss/article/view/317
Riyanto, D. (2007), Accounting firm size effect on earning response coefficients, Journal of Financial and Business, Vol. 5 No. 2, pp. 172-199.
Salehi, M., Lari Dasht Bayaz, M., Mohammadi, S., Adibian, M. S., & Fahimifard, S. H. (2020). Auditors’ response to readability of financial statement notes. Asian Review of Accounting, 28(3), 463–480. https://doi.org/10.1108/ARA-03-2019-0066
Salehi, M. (2020), The relationship between the companies’ political connections and audit fees, Journal of Financial Crime, Vol. 27 No. 4, pp. 1123-1141. https://doi.org/10.1108/JFC-04-2020-0066
Salehi, M., Saravani, M., & Rouhi, S. (2020). The relationship between audit components and audit market adaptability. Journal of Financial Crime, 27(3), 835–853. https://doi.org/10.1108/JFC-03- 2020-0035
Salehi, M., Fakhri Mahmoudi, M.R., & Daemi Gah, A. (2019). A meta-analysis approach for determinants of effective factors on audit quality: Evidence from emerging market. Journal of Accounting in Emerging Economies, 9(2), 287–312. https://doi.org/10.1108/JAEE-03-2018-0025
Saleh, I., Abu Afifa, M., & Alsufy, F. (2020). Does Earnings Quality Affect Companies’ Performance? New Evidence from the Jordanian Market. The Journal of Asian Finance, Economics and Business, 7(11), 33–43. https://doi.org/10.13106/JAFEB.2020.VOL7.NO11.033
Shu, S.Z. (2000), Auditors resignations: clientele effects and legal liability, Journal of Accounting and Economics, Vol. 29 No. 2, pp. 173-205.
Sumiadji, Chandrarin, G., & Subiyantoro, E. (2019). Effect of audit quality on earnings quality: Evidence from Indonesia stock exchange. International Journal of Financial Research, 10(1), 86–97. https://doi.org/10.5430/ijfr.v10n1p86
Ticoalu, N. Y. (2020). Earnings Persistence, Systematic Risk, Audit Quality, and Earnings Response Coefficient Rosinta Ria Panggabean (Corresponding author), (October).
Vichitsarawong, T., & Pornupatham, S. (2015). Do audit opinions reflect earnings persistence?
Managerial Auditing Journal, 30(3), 244–276. https://doi.org/10.1108/MAJ-12-2013-0973 Wallace, W. (2004). The economic role of the audit in free and regulated markets: A look back and a look forward. Research in Accounting Regulation, 17(1), 267–298
Wallace, W. (1980). The economic role of the audit in free and regulated markets: A look back and a look forward. Research in Accounting Regulation, 17(1), 267–298.