International Auditing Standards, Audit Quality, and Information Asymmetry

Abstract

Using hand-collected data on public firms listed on the Alternative Investment Market (AIM) in the U.K. between 2000 and 2007, we investigate whether mandatory adoption of International Standards on Auditing (ISA) for auditors affects audit quality and information asymmetry. In a difference-in-differences analysis, we find that the probability of receiving a going-concern opinion is greater while the propensity to report a small profit and the level of absolute accruals are smaller for AIM firms following ISA adoption relative to a control group. These results are unlikely driven by the mandatory adoption of International Financial Reporting Standards (IFRS), as AIM firms are not required to adopt IFRS in our sample period. We also find a significant reduction in information asymmetry for AIM firms after ISA adoption, measured by the number of zero-return days, bid-ask spreads, and price impact of trades. Our results suggest that mandatory ISA adoption for auditors enhances audit quality and capital market information environment.