Audit Quality and the Health of the Health Industry

A Master of Business Administration (MBA) by Nour Kousa entitled, “Audit Quality and the Health of the Health Industry”, submitted in May 2025. Thesis advisor is Dr. Feras M. Salama. Soft copy is available (Thesis, Approval Signatures, Completion Certificate, and AUS Archives Consent Form).

Abstract

Audit quality plays a key role in shaping corporate financial stability, especially in heavily regulated sectors such as pharmaceuticals. While past research has examined the general effects of audit quality on companies, its specific impact on the financial stability of pharmaceutical firms remains underexplored. This study addresses this gap by comparing the United States and European markets, focusing on firms audited by the largest global audit networks (Big Four) versus those audited by smaller audit firms. Using a comprehensive dataset, the analysis reveals that firms audited by the largest global audit networks exhibit lower financial volatility and more stable returns, likely due to enhanced transparency and reduced information asymmetry. In contrast, firms audited by smaller audit firms demonstrate higher average returns but greater instability, suggesting a risk-return trade-off that may appeal to risk-tolerant investors. Notably, the largest global audit networks deliver consistent financial stability in both the United States and Europe, underscoring the robustness of their standardized practices. However, smaller audit firms in Europe show significantly higher volatility than their United States counterparts, implying that regulatory compliance alone does not ensure audit quality. The study also challenges the assumption that frequent auditor rotation improves outcomes; instead, longer auditor relationships, coupled with rigorous standards, may enhance financial oversight, particularly in complex industries like pharmaceuticals. These findings advocate for reconsidering mandatory auditor rotation policies and strengthening oversight of smaller audit firms to improve reporting quality and investor confidence.