The Differentiation of Quality among Auditors: Evidence from the Not‐for‐Profit Sector

The association between auditor size and audit quality is examined for a sample of not‐for‐profit (NFP) entities. The audit quality measure is based on the entities' compliance with eight GAAP reporting requirements. The numbers on compliance supports policymakers' contention (prior to the recent issuance of three new statements) that reporting by NFPs was inconsistent. Of the eight reporting requirements examined, noncompliance is highest for those that pertain specifically to NFPs, for example, disclosures about pledges and donated materials. However, the extent of noncompliance decreases as one moves from the small non‐Big 6 to the large non‐Big 6 and from the large non‐Big 6 to the then Big 6. This positive association between auditor size and audit quality is borne out in multivariate regression analyses, after controlling for other correlates of audit quality. Another measure of audit firm size, based on the number of professionals employed by the firm, further confirms this finding. In addition, the results indicate that there are other factors, i.e., client size, financial health, client wealth, and participation in a peer‐review process, that impact audit quality.