Has audit quality declined? Evidence from the pricing of discretionary accruals

This study examines whether the audit quality of Big 5 auditors declined after 1995. A decline in audit quality is measured by whether there is greater accruals-based earnings management, lower proportion of audit qualifications and lower pricing of discretionary accruals over the period 1991-2000. Using a sample of more than 4,500 clients of Big 5 auditors for the same period, we find that for the average client, the absolute value of discretionary accruals scaled by total assets is significantly greater for the years 1996-2000 compared to 1991-1995. We also find an increase in the percentage of unqualified audit reports and a decline in the pricing of discretionary accruals over the same period. Our results (including an overall year by year analysis) suggest a decline in Big 5 audit quality over the sample period.