The effect of audit firm size and the Covid-19 pandemic on audit quality: evidence from Belgium

Abstract

This paper examines the effect of audit firm size (Big 4 versus non-Big 4) and the COVID-19 pandemic on audit quality in Belgium. To assess audit quality in this country, a multiple linear regression analysis is conducted on a sample of 3,343 large and very large Belgian entities spanning from 2016 to 2020. Audit quality is proxied by discretionary accruals determined thanks to the performance-adjusted Jones model (Kothari et al., 2005). The findings present compelling evidence of a statistically significant disparity in discretionary accruals between enterprises audited by a Big 4 and those overseen by alternative auditors in Belgium. Additionally, the study identifies a statistically significant positive correlation between the magnitude of discretionary accruals and the COVID-19 outbreak, suggesting diminished audit quality during this period of disruption. These findings remain robust across various model specifications and empirical designs. Nevertheless, there is no statistically significant correlation between audit quality and the performance of an audit assignment by a Big 4 firm in Belgium during the pandemic. Only a supplementary analysis reveals that negative discretionary accruals were statistically significantly more positive for Big 4 clients throughout the health crisis period. Further tests indicate that corporations with higher returns on assets and sales growth rates exhibit lower audit quality from auditors. The study also uncoversthat as Belgian firms expand in terms of total assets, there is a corresponding reduction in their employment of discretionary accruals in absolute value, thereby resulting in an improved level of audit quality. Moreover, our study provides evidence that Belgian companies with progressively elevated long-term debt-to-total-assets ratios and favourable liquidity positions, as assessed by high current ratios, are associated with better audit quality. Conversely, when firms experience losses, they tend to engage in greater manipulation of their financial results through higher levels of discretionary accruals in absolute terms, which leads to a decline in audit quality.