Quantization and Empirical Evaluation of New Measure of Accounting Quality

Abstract

<p>Recent studies (e.g., Hribar et al 2014) suggest that audit fees have information about numerous factors such as the range and extent of audit verification, audit risk, employer dignity, and overall accounting quality. Thus, by controlling the multiple factors, the residual part of audit fees can be considered as a new measure of accounting quality. The purpose of this study in the first place is quantization and in the second place is empirical evaluation of the measure.<br>After controlling a series of factors affecting the audit fee, the absolute residual of the audit fee model gives one proxy for a new measure of accounting quality. For empirical evaluation, the relation between the new measure and other traditional measures (such as the Jones model, modified Jones model, Dichev & Dishaw model, the variability of profits, and income smoothing) is used. Statistical population includes all of the firms listed in the Tehran stock exchange in the period from 2007 to 2014.<br>The findings indicate a significant relationship between the new measure of accounting quality and Jones and modified Jones models. However, evidence indicates no significant relation between the new measure of accounting quality and other traditional measures.<br>In sum, the evidence suggests that the new measure of accounting quality cannot capture the different dimensions of accounting quality in Iran.<br></p>