Audit Quality and the Accrual Anomaly

Abstract

Prior research has demonstrated an association between the magnitude of accrual anomaly-related trading returns and accrual reliability. This study first demonstrates an association between audit quality and accrual reliability. It then links this result and the prior literature to demonstrate an association between audit quality and the accrual anomaly. We find that the magnitude of accrual-related trading returns are negatively associated with audit quality; lower audit quality leads to greater accrual anomaly-related trading returns. We then demonstrate that the link between audit quality and the accrual anomaly has been attenuated by Sarbanes-Oxley-related reforms.

Keywords: Sarbanes-Oxley, Audit quality, accruals, reliability, accrual anomaly

JEL Classification: M41, M43, M49, G14, K22, G38