The impact of cultural dimensions on audit quality

This thesis provides evidence for the relation between national culture and audit quality, by examining the cultural dimensions of Hofstede for forty countries and comparing them to the amount of abnormal accruals of companies in that countries. I hypothesized that dimensions individuality, power distance, masculinity and uncertainty avoidance are negatively related to audit quality, and long-term orientation is positively related to audit quality. A Compustat dataset of 121,507 observations of firms is used to do the analyses. Regression analyses and a robustness check gave the result that individuality, power distance, uncertainty avoidance and long-term orientation are strongly related to audit quality on a 5 percent significance level. Masculinity is related to audit quality on a weaker level than the other dimensions. Due to the mixed coefficient findings of the regressions and the robustness check, the evidence is too little to conclude anything about the directions of that relationships. In conclusion, this thesis found evidence that culture has a significant effect on audit quality when corrected for time, industry and country fixed effects, nevertheless it is not evident if individualism, power distance, masculinity, uncertainty avoidance and long-term orientation affect audit quality in a negative or in a positive way.