The Advertising Effect of Quality Control Information Disclosed by Audit Firms

ABSTRACT We examine whether audit firms' disclosure of quality control information (QCI) affects client firms' auditor choice. We find that audit firms that disclose more QCI have a greater probability of being selected by client firms. Cross‐sectional analysis reveals that this effect is more pronounced when client firms face more serious agency problems, are less familiar with the successor audit firm, and have a higher demand for high‐quality audits. Furthermore, we find that disclosing QCI is not significantly associated with high‐quality audit services. Overall, our findings suggest that audit firms' QCI disclosure is a form of advertising that may attract client firms when they are choosing their auditors, without reliably signalling higher audit quality. Our findings offer valuable insights to regulators seeking to monitor voluntary disclosure by audit firms.