The Role of Pre-Audit Financial Reporting Quality in Detecting Audit Quality: Implications for Sample Selection

SUMMARY This paper examines the importance of appropriate sample selection in empirical research on audit quality, particularly focusing on how pre-audit financial reporting quality (FRQ) affects the ability to detect audit quality. Because post-audit FRQ is jointly determined by audit quality and pre-audit FRQ, high pre-audit FRQ may constrain the auditor’s capability to make measurable improvements, thereby obscuring evidence of high audit quality. This study develops a proxy for clients’ pre-audit FRQ and stratifies the sample accordingly. Using the Big 4 effect setting as the primary context, we find that the positive effects of high audit quality are most observable among clients with low pre-audit FRQ, whereas such effects are not evident among clients with high pre-audit FRQ. These findings are robust to alternative specifications, including the use of industry specialist auditors and various sensitivity analyses. Future research on audit quality could consider the role of pre-audit FRQ in sample selection. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.