The Sensitivity of Accounting Conservatism to Audit Quality

Abstract

This research examines the reaction of earnings conservatism with respect to audit quality at 155 listed companies in Tehran Stock Exchange, over the period of 2007 – 2012. The conservatism model that suggested by Basu (1997) is used for measuring accounting conservatism. The model is based on the relationship between earnings and return, in which auditor size for measuring audit quality, as dummy variable takes 1 for the firms audited by the Iranian audit organization as a big auditor, and 0 otherwise. The panel regression model is used for testing the research hypotheses. The result showed that there is a positive and significant relationship between accounting conservatism and audit quality. This suggests that the firms audited by big auditors tend to accept higher conservatism. Also, dividend payout ratio has a positive and significant effect in this relationship, but there is no evidence for the effect of market leverage and earnings quality in this relationship.

Keywords

• : accounting conservatism
• audit quality
• earnings quality
• market leverage
• dividend payout