DOES AUDIT QUALITY IMPROVE QUALITY OF ACCOUNTING INFORMATION IN PAKISTAN'S CAPITAL MARKET?

Abstract

This study investigates the association of audit quality and the quality of financial information
proxied by earnings management for non-financial firms listed at Pakistan Stock Exchange (PSE)
from 2000-2016. This study is based on the argument that audit quality, proxied by Big 4 auditors,
improves the quality of financial information by restricting managers' discretion in reporting
accounting information or limiting their ability to expropriate shareholders' wealth (reducing
earnings management). The study finds evidence that big 4 auditors constrain earnings management
of their client firms. A probable reason could be that these audit firms have more resources, knowledge
and experience regarding their client firms. The study has implications for corporations whose aim is
to satisfy the needs of shareholders. The results of this study will help corporations in enhancing the
perception of shareholders about the reliability of financial information. If shareholders are able to
get accurate information, their ability to make investment decisions becomes more effective on the
basis of high quality financial information.