The Voluntary Choice of an Auditor of Any Level of Quality

We examine the choice of auditor by 380 incorporated societies in New Zealand. Incorporated societies may choose whether to be audited, and are free to choose an auditor of “any level of quality.” We measure audit quality levels, in order of increasing quality, as: (1) whether the entity chooses to be audited, (2) whether the auditor is a qualified or unqualified accountant, (3) whether the qualified accountant is an individual or a chartered accountancy firm, (4) whether the audit firm is large, and (5) whether the large audit firm is a member of the Big 5. We test whether variables representing demand for auditing by incorporated societies are associated with mechanisms that indicate auditor quality to users. We find that larger entities, and entities with higher salaries as a proportion of revenues and higher debt as a proportion of assets are more likely to be audited; they are also more likely to choose chartered accountancy firms and to choose larger audit firms. Entities with a higher proportion of their revenue from members are more likely to choose Big 5 auditors. These results are consistent with DeAngelo's (1981) and Watts and Zimmerman's (1986) explanations for professional auditing institutes, audit firm size, and audit firm reputation as surrogates for auditor quality.