Auditor Type and Audit Quality: Evidence from Audit Adjustments and Opportunistic Financial Reporting

In response to some debts regarded to the audit quality of public sector audit institutions (Audit Organization and Mofid Rahbar Institute), in this research, using two objective measures of audit quality, including audit adjustments and opportunistic restatements, I investigate the relationship between the auditor type and the audit quality. The results obtained from the data related to 211 firms during 1389 to 1400 (including 2,218 firm-year observations), show that the clients audited by the Audit Organization and Mofid Rahbar Institute, use less discretionary accruals. In line with these findings, the results I find that clients of public sector audit institutions have less audit adjustments (the differences between pre-audit earnings and audited earnings), especially profit-reducing adjustments. Also, the clients of these two auditors have less subsequent opportunistic financial restatements. These findings provide evidence in support of the higher audit quality of public sector audit institutions, as a result of the higher quality of their clients' financial reporting.