Audit Opinions and Legal Environments：International Evidence

[Purpose]This study investigates the joint effect of auditor size and legal environments on audit opinion, a proxy for audit quality, in a cross－country setting. [Methodology]By using an international sample with 284,374 firm－year observations from 28 countries for the period of 1990－2017, we conduct multiple regression analyses of audit opinion on auditor size and the indexes of legal environments. [Findings]We find that both Big 4 and non－Big 4 auditors are more likely to issue non－clean opinions as the investor protection law becomes more strict. We also find that Big 4 auditors provide relatively more conservative audit than non－Big 4 auditors in the treatment of their respective clienteles when moving from weak to strong investor protection countries. Our evidence suggests that Big 4 auditors, in particular, provide higher quality audit in stronger legal environments where threats of litigation are higher. Moreover, result also suggests that strong legal environments need to be established as a necessary or complementary condition for the enhancement of audit quality. [Policy Implications]We add new evidence on the joint effect of auditor size and legal environments on audit quality by suggesting that auditor size and legal environments are complementary, rather than substitutive, for the issuance of non－clean audit opinion (i.e. high quality audit). Our findings may provide an important policy implication that accounting regulators need to strengthen investor protection law as the complementary environments, not as a substitutive mechanism, for high quality audit.