Audior selection in the Istanbul Stock Exchange: An Empirical analysis

Increased competition in audit market brings out a desire to understand the factors that influence the decision of auditor selection. In recent years there have been a considerable number of studies on the selection of independent auditors by client firms. These studies were conducted predominantly in the US and occasionally some used samples from Australia and the UK that have economies similar to that of the US. This study will be among the few exceptions, which shed light on the auditor selection process in an emerging market. The paper contributes to the auditor selection literature by examining the auditor selection process in a market in which the supply and demand for independent audits has changed dramatically by a radical reform and liberalization in 1986. The argument that companies with different firm characteristics demand varying levels of audit quality constitutes the basis for our research. The purpose of this study is to build an empirical model to find out the relationship between auditor selection and client firm characteristics for the firms listed in Istanbul Stock Exchange (ISE) for the years 1999, 2000 and 2001. We analyze the choice of auditors by 569 companies throughout the sample period. We find that size of the client firmss, shareholdings by foreign shareholders, membership in the finance sector are positively and significantly associated with the choice of a Big-Five auditor during the sample period. The significant firm characteristics which determine the Big-Five auditor selection is valid when we compare Big-Five with second-tier firms and local audit firms. The comparison of second-tier versus local auditors reveals that firm characteristics are same within the same group except membership in finance sector. These findings reveal that second-tier international audit firms seem to be distinguished from the Big-Five but not specifically from the local audit firms.