Investigating the Effect of Audit Quality on Sustainability of Earnings (Case study: a Comparison between Financially-Distressed Companies and the Rest of Companies in Tehran Stock Exchange)

Earnings quality and sustainability increase the desirability of earnings to shareholders. However, audit is what may control the opportunist behavior of management, reduce agency conflicts between shareholders and managers and contribute to sustainability of earnings. A high quality audit can affect earnings quality and sustainability as well as the amount of discretionary accruals applied by management. In this regard, the present study aimed to investigate the effect of audit quality on earnings sustainability in financially-distressed companies as compared with other companies listed in Tehran Stock Exchange (TSE). A set of inclusion criteria were applied to select 184 TSE companies as the research sample. The temporal domain of the study was from March 21, 2005 to March 20, 2012. The data were collected using available software, websites, journals and other information resources. Six hypotheses were tested in the present study. Audit quality was measured by using three criteria including audit firm size, auditor industry specialization and auditor tenure. The results of testing the research hypotheses showed a significant positive correlation of audit firm size and auditor specialization with sustainability of earnings. However, there was no significant correlation between auditor tenure and sustainability of earnings. The findings also revealed that the correlation between audit quality (auditor size and specialization) and sustainability of earnings was stronger in financially-distressed than non-distressed companies. Applicable and research recommendations are made to guide further studies on the topic.