The Relationship between Auditor Reputation and the Cost of Equity Capital(With an Emphasis on Client Size)

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1 Advances in Environmenal Biology, 7(10) Sepember 2013, Pages: AENSI Journals Advances in Environmenal Biology Journal home page: hp:// The Relaionship beween Audior Repuaion and he Cos of Equiy Capial(Wih an Emphasis on Clien Size) 1 Diar Ahmadzedeh, 2 Younes Badavar-e Nahand 3 Rasool Baradaran Hasanzadeh 1 Deparmen of Accouning, Eas Azarbaijan Science and Research Branch, Islamic Azad Universiy, Tabriz, Iran, 2 Deparmens of Accouning, Tabriz Branch, Islamic Azad Universiy, Tabriz, Iran. 3 Deparmens of Accouning, Tabriz Branch, Islamic Azad Universiy, Tabriz, Iran. ARTICLE INFO Aricle hisory: Received 12 Sepember 2013 Received in revised form 24 Ocober 2013 Acceped 5 Ocober 2013 Available online 5 November 2011 Key words: Audi Qualiy, Audior Repuaion, Cos ofequiy Capial, Clien Size. ABSTRACT Providing high qualiy and favorable audi services alongside providing a proper image of accuracy of managemen s claims can be effecive in deermining he risk of invesmen in he firm. The cos of equiy capial is he minimum rae of reurn ha shareholders demand on he firm in proporion o he invesmen risk. This sudy examines he relaionship beween audior repuaion and he cos of equiy capial (wih an emphasis on clien size) in Iran. Naural logarihm of he audi fee revenue of exchange firms is used o deermine audior repuaion and Gordon model is used for calculaing he cos of equiy capial. In his sudy, 93 firms lised in Tehran Sock Exchange since2006 o 2011have been reviewed. Mehods of research are correlaional and causal pos even and hypohesis esing mehods are correlaion and regression. Eviews 7 and SPSS 16 sofware were used o es he hypoheses. Our findings show ha here is a negaive relaionship beween audior repuaion and he cos of equiy capial. By aking he clien (firm) size ino accoun, a posiive relaionship beween audior repuaion and he cos of equiy capial is observed AENSI Publisher All righs reserved. INTRODUCTION Audi qualiy is one of he imporan issues in he field of audiing and capial marke. In order o undersand he implicaions and differen aspecs of audi qualiy, various sudies have been conduced by researchers o explore he relaionship beween audi qualiy and oher variables. However, since he audi qualiy is hardly visible in acion, research in his area has always been faced wih many problems. Many facors affec he qualiy of audi services, however very lile researches have been performed in order o develop a model o describe he qualiy of audi services [1].On he oher hand, he effec of he cos of equiy capial on invesmen and financing decisions is one of he mos remarkable and imporan issues in financial researches and is he main facor in creaing he gap beween accouning profi and economic profi. Wih he formaion of he opic of he separaion of managemen from ownership and creaion of a huge conflic of ineres beween owners and managers, evaluaing he performance of firms and heir leaders and managers have been subjecs of ineres o various sraa such as crediors, landlords, governmen and even managers. One of he ways ha financial managers can affec he shareholders wealh and hus maximize heir wealh is deermining favorable (opimal) capial srucure. Financing sources generally include deb, common sock, preferred sock and reained earnings. Financial managers should ake advanage of one or a combinaion of hese sources o provide required capial for new invesmens and each of hese sources have differen effecs on reurns (profi) of he curren sakeholders. The cos of equiy capial is criical in invesmen and managemen decisions ha affec he allocaion of resources in sociey [2].So according o he above menioned issues, he aim of his sudy is o idenify he lieraure and heoreical framework regarding he relaionship beween audior repuaion and he cos of equiy capial and o answer he quesion of wheher he audior's repuaion and he cos of equiy capial (Wih an Emphasis on Clien Size) is conneced or no? Lieraure and Theoreical Framework of Research: Audi Qualiy: Corresponding Auhor: Diar Ahmadzedeh, Deparmen of Accouning, Eas Azarbaijan Science and Research Branch, Islamic Azad Universiy, Tabriz, Iran, Diiyar34@yahoo.com

2 2706 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: In applied lieraure, audi qualiy has ofen been defined hrough is compliance wih audiing sandards. In conras, researchers in accouning and audiing have considered muliple dimensions of audi qualiy. The menioned dimensions have ofen led o various definiions. One of he mos common definiions abou audi qualiy is he definiion proposed by "Di Angelo". She defines audi qualiy as he marke assessed" wih he probabiliy ha an audior will (1) discover maerial missaemen in he financial saemens and accouning sysem of he employer, and (2) repor he maerial missaemen. The probabiliy of maerial missaemen deecion by he audior depends on his/her mer and he probabiliy of maerial missaemen reporing by he audior depends on his/her independence. Di Angelo has defined he acual qualiy of audi based on users percepion or so-called marke percepion of audi qualiy. Using his definiion in expressing he acual qualiy of audi will be conduced wih he assumpion ha he percepion of audi qualiy reflecs he acual qualiy of audi [1]. Audior Repuaion: Audior repuaion is so imporan ha capial marke and is paricipans may evaluae audi qualiy based on he audior s repuaion and no his/her abiliy o discover and repor maerial missaemens of financial saemens. Was and Zimmerman argue ha repuaion and credibiliy are incenives o audiors o remain independen. Obaining credi hrough reporing violaions coss oo much, bu afer realizing, he demand for audi services and audi fees were increased and audior s credi is considered as a guaranee of his independence[3]. Benson believes ha he imporance of repuaion is a srong incenive o mainain he independence of he audiors. Any compromise over he audior independence, leads o a loss of populariy, and hus weakens he marke of audi services. Wih regard o he above research records, audior repuaion can be defined as a crierion for evaluaing he audi qualiy by capial marke and he relaionship beween referred works o he audior and his/her repuaion can be examined [4]. Audior s good repuaion is relaed o he marke s percepion of his/her meri and objeciviy (independence in appearance). I displays he audior s abiliy o enhance he credibiliy of financial saemens (even in he absence of high qualiy daa). Good repuaion is probably as an aribue of audi firm s size. In fac, he abiliy of audior o oversee can change wih he ype of audi conrac. Thus, as he recen scandals such as Anderson scandal have proved, he audior's good repuaion, a leas in shor erm, can lead o valid percepion of poor qualiy informaion. <<The differeniaion beween real and perceived audi qualiy is imporan where users consider some pars of he financial collapse as a resuls of audior s work and do no accep his/her qualificaion in performing his/her duy. In his case, he primary loss is simply he cos of audi. However, if users simply accep he audior's qualificaions, while such rus is inapposie, he poenial loss is much more serious (AAA, 1973). Recen audi collapses affirm ha how serious losses can be fair (like Enron). The menioned collapses also include conceps ha assume audi qualiy he same as audior s size in economic issues>>[1]. The resul of big audi firms repuaion is ha hey have audi groups specialized in differen indusries, provide high qualiy services, use knowledgeable consulans in various sciences, consider independence sandards, consider high sandards of qualiy and finally hey demand proper fees. Therefore, oher audi firms mus be able o provide high qualiy services wih lower cos and beer suied audi fees in order o compee wih hese insiuions. Because big audi insiuions have higher repuaion ha is considered as a credi for heir audi repor [5]. Cos of Equiy Capial: Making decisions and judging abou he mos appropriae way of invesmen wih he aim of maximizing shareholders wealh is one of he mos imporan issues in he field of financial managemen. To achieve he above aim, maximizing revenues from invesmens and minimizing he capial are considered wo appropriae approaches. Accordingly, knowing he cos of capial has always had an imporan role in corporae decisions. The mos imporan applicaion of he concep of cos of capial can be saed as follow, if a firm s rae of reurn on invesmen is greaer han is cos of capial and if his rae increase wihou he increase of degree of risk, shareholders wealh will increase. The reason is ha if a firm s rae of income is greaer han is cos of capial, bond-holders and preferred sockholders will reach o he preferred rae of reurn and he remaining rae of reurn will be provided for common sakeholders ha would be higher han heir expeced reurn rae [2]. Clien size (firm size): Firm size is one of he firm's inernal facors. Firm size is one of he facors deermining he volume and variey of aciviies ha he firm is doing. In fac, he bigger he firm size, he volume and variey of aciviies done by he firm will be greaer. Many researchers believe ha bigger firms have more credibiliy in erms of capial marke; herefore, hese firms will have easier access o more resources wih low ineres. Hence,

3 2707 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: whaever he size of firms may be smaller, Capial markes and credi insiuions, will aach more loans and lower credis wih higher ineres o hem [6]. So, he regulaory sae and role of audior apparenly demands his reasonable assurance ha financial saemens be free and devoid of false saemens raher han o guaranee agains losses o he invesor. In oher words, i can be noed ha insead of guaraneeing he invesor agains loss, i should be guaraneed ha financial saemens are correc. This guaranee can be achieved boh reducing he negaive effecs of separaion of ownership and conrol and reducing he imbalance of informaion beween users of financial saemens (such as invesors) and heir suppliers. Consequenly, audi is a means of reducing informaion risk for users of financial saemens. The reducion of risk should be adjused and mached o he reducion of he cos of equiy capial. Thus, while he assurance role of audi is imporan, i is argued ha his role is no an original and primary role like conrol and informaion role [7]. Research Background: Was and Zimmerman have adduced o hisorical examples o defend he idea ha audiors defend heir professional repuaion in capial marke. Repuaion is an incenive o mainain he independence of he audiors. However, he incenive o achieve mechanism repuaion iself is a regulaor for independence mainaining[3]. Clarkson and Simonich examined he sraegies of employer s risk and good repuaion of audior. Resuls of his sudy show ha here is a posiive relaionship beween audior s good repuaion and he specific employer s risk in he Iniial sock markes of Canada bu his does no apply o he iniial supply marke of America. The sudy concluded ha audi qualiy (measured by audi firm revenues) is no used as a subsiue mark for independence mainenance in he iniial supply markes of America s sock [3]. Besson e al concluded ha he cos of equiy capial decreases and reduces for he firms by increasing he qualiy of informaion [3]. Zhin Chang e al examined he relaionship beween qualiy and repuaion of audiors and he financial decisions in he firm. They provided a model and evidences ha audiors repuaion and qualiy affec he financial decision of he firm and hey showed ha high qualiy of audiing reduces he impac of marke condiions on financial decisions of he firms and heir capial srucure [8]. Yong Li e al sudied he relaionship beween audi qualiy, accouning aribues and he cos of equiy capial. Their resuls showed ha evaluaion of audi qualiy using wo dimensions of specializaion of audior indusry and audi fees is unpredicable. They also found ha here is a meaningful relaionship beween higher audi qualiy wih lower cos of equiy capial, measuring audi qualiy based on unexpeced audi fees, as well as adjusing he posiive impac of accruals on he cos of equiy capial [9]. Fernando e al in heir sudy eniled audi qualiy aribues, clien size and he cos of equiy capial concluded ha here is a negaive relaionship beween audi qualiy aribues and clien size of he cos of equiy capial. Their resuls also showed ha he negaive correlaion is limied only o he small cliens and poenially reflecs poor environmen daa relaed o such firms [7]. Karjalainen has addressed he relaionship beween audi qualiy and cos of deb capial for privae firms in his sudy. Their findings showed ha four big audiing firms, and audiing wih more han one responsible audior, is associaed wih reducion of cos of deb capial. Firms are also faced wih change in audiing repor, reducion of accruals qualiy and increase of cos of deb capial. They also found ha wo elemens of audi qualiy and audi effecs are concerned in pricing deb capial for privae firms. Furher analysis shows ha, while he resuls of audi are imporan in pricing regardless of firm size, bu undersanding audi qualiy is more imporan for bigger privae firms [10]. Embong e al have sudied he relaionship beween firm size, disclosure and cos of equiy capial. Their resuls showed a significan negaive relaionship beween disclosure and cos of equiy capial for big firms bu here is no significan relaionship for small firms [8]. Khanbeigi and Khaleghi Moghadam invesigaed he relaionship beween conservaism and imeliness of ne income wih firm size and audi firm size. Their resuls showed ha while firms ne income is generally conservaive, bu has no been more imeliness and conservaive over ime. Two facors of firm size and audi firm size have no affec wo examined aribues of ne income in his sudy, so ha he ne income of big firms in comparison wih small firms, and ne income of firms audied by audi organizaion in comparison wih ne income of firms audied by audi firms rused by Sock Exchange, are more conservaive and imeliness [11]. Ahmadpoor and ohers examined he impac of corporae governance and audi qualiy on he cos of deb financing (borrowing).they concluded ha exisence of insiuional major invesors in ownership srucure and monioring heir work has a meaningful decreasing effec on cos of deb of member firms, whereas audi qualiy does no have such impac [12]. Shamizade sudies he relaionship beween audi qualiy and income aribues wih capial cos. His resuls show ha conrolling financial leverage variables, firm size and he raio of marke value o book value confirms ha here is no relaionship beween audi qualiy and cos of capial and here is a relaionship beween

4 2708 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: income s qualiy aribues, income persisence, he predicive capabiliy of income, profi-o-equiy and imeliness of income-o-capial cos, bu no relaionship was observed beween conservaism wih cos of capial[13]. Research hypoheses: This sudy sough o examine he associaion beween audior repuaion and he cos of equiy capial (wih an emphasis on clien size), so his sudy examined wo main following hypoheses: The firs main hypohesis: There is a relaionship beween audior repuaion and he cos of equiy capial. The second main hypoheses: clien size has impac on he relaionship beween audior repuaion and he cos of equiy capial. MATERIALS AND METHODS Populaion and research sample: The sudy populaion consised of all lised firms in Tehran Sock Exchange since 2006o2011.Namely a sixyear period is considered. These firms and his period were chosen as a populaion because access o heir audi financial saemens was parly easy. Sampling is based on sysemaic eliminaion mehod, so firms included in he sample selecion mus mee he following condiions: 1. They mus be acceped in Tehran Sock Exchange before 2003, because he daa of las 36 monhs is required for calculaing bea which is a par of conrol variables; 2. Their socks mus be raded in exchange and heir aciviy mus no be inerruped, hus firms ha had a leas 3 monhs rading inervals have been removed from sample selecion; 3. Their financial erms mus have no changed; 4. Their financial year should end a he end of March each year; 5. They should no be a financial and cred invesmen and leasing insiuion because hese firms are srucurally differen from oher companies; Due o he imposed resricions, finally 93 firms have been seleced from 11 differen indusries. Mehods: This sudy is correlaional and causal pos even and hypohesis esing mehods are correlaion and regression. Independen variable: Audior Repuaion: To measure he audior's repuaion, he naural logarihm of he audi fee revenue of exchange firms will be used: LAF = LN (Audi fees) Dependen Variable: Cos of Equiy Capial: For calculaing he cos of equiy capial Gordon model is used as follows: K s = D1 DPS +g g = ROE (1-d) d= P0 EPS ROE= NeIncome AverageEquiyCapial EPS= Ne Income Number of Common Socks EPS: Earnings per share, D1: earnings forecas for nex year, ROE: reurn on common shareholders, P 0 : Marke value of common sock a he beginning of he period. Clien (Firm) Size: To conrol he effec of his variable on he cos of equiy capial, he logarihm of he oal asses of he selecedfirms are used. Sysemaic risk (β): Bea coefficien is a number for comparing alignmen inensiy of firm s reurn wih whole marke index reurns. Bea coefficien is also known as sysemaic risk (versus non-sysemaic risk ha is he square roo of sandard deviaion of reurn). The following formula is used for bea calculaion:

5 2709 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: Cov(Zp, Zm) σ m 2 Cov (Z p, Z m ): Covariance beween porfolio reurn and reurn on he marke. σσ mm 2 : Variance of marke reurns. Financial Leverage: Financial leverage shows he funds ha are financed by deb. In his sudy, we divided oal liabiliies over oal asses in year in order o calculae he leverage of he company (Lev ): L Lev = A Lev i, L i, A i, = level of i firm leverage in year, = oal liabiliies of i firm in year, = oal asses of i firm in year. The raio of book value o marke value of sock: Book value can be a crierion for sock value which represens ne asses. Book value is calculaed by dividing equiy capial a he end of he financial year by he number of common sock. The value of sock marke is imporan for shareholders as a measure of invesmens value, Marke value of all he issued socks represens he firm's curren value. Sock marke value is calculaed by he average of sock price a he beginning and he end of he year. Annual sales growh: Annual sales growh is as he difference beween sales of he year in comparison wih sales of las year, and is calculaed as follows: GRW = (Eps 2 Eps 1 ) / Eps 1 Sandard deviaion of monhly sock reurns: Reurn can be defined as he change of sock value as well as is income during a specified ime period. Sock reurn volailiy is disribuion of sock reurn relaive o is average. To calculae sock reurn from sock price reurns volailiy for monhly periods during he year, we do as follows: Pi, Pi, 1 ri = Pi, 1 rr ii = monhly reurn of i sock, PP i = he price of i sock a he end of monh, PP i 1 = he price of i sock a he end of monh ( ri ri) SD = n 1 Resuls: Descripive saisics: The resuls of descripive analysis of daa are given in Table 1. Table 1: Resuls of Descripive Analysis of Research Daa Variable Mark Number observaions Cos of equiy capial COEC Audior repuaion FEE Ineracion beween Fee*Size audior size and repuaion Risk β Leverage LEV Firm Size SIZE Book value-o-marke BM Annual growh GRW Monhly sock reurns STDEV of Average 0/523 6/053 82/15 0/862 0/615 13/48 0/637 0/308 0/092 Sandard deviaion 0/312 0/802 17/37 0/633 0/173 1/45 0/209 1/97 0/075 Minimum 0/01 4/248 50/29-1/65 0/135 9/85 0/108-0/97 Maximum 0/997 8/ /3 4/880 0/953 19/96 0/985 43/81 0/576

6 2710 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: The resuls of descripive analysis show ha he average cos of equiy capial in sample firms is equal o0/523.however, due o he large disance beween he minimum and maximum of he variable, i can be noed ha his variable had a low sabiliy and reliabiliy during he sudy period. The audior repuaion on average is equal o 6/053 and he average of audior's size and repuaion is equal o 82/15. The average of sysemaic risk (β) of sample firms is equal o0/862, and he average of firm size is equal o 13/478. The average of leverage and he raio of book value o marke value of sample firms are respecively equal o 0/615 and 0/637.Finally, in he minimum values he variable wih he lowes rae is sysemaic risk, and in he maximum values he variable wih he highes rae is he calculaed annual growh. The Firs Hypohesis of he Sudy and he Model Used: The firs hypohesis saed: There is a relaionship beween he audior repuaion and he cos of equiy capial. The following mulivariae model has been used o es he firs research hypohesis: CoEC = C + β1( FEE ) + β 2 ( BETAi, ) + β3( LEV ) + β 4 ( SIZE ) + β5( BM + β6 ( GRWi, ) + β7 ( STDEV ) The resuls of he firs hypohesis Regression model es are presened in Table 2. ) Table 2: Resuls of he firs hypohesis Regression Tes Variable Name Variable Symbol Consan Value C Audior Repuaion β 1 (FEE) Risk β 2 (BETA) Leverage β 3 (LEV) Firm Size β 4 (Size) Book value-o-marke value β 5 (BM) Sale Growh β 6 (GRW) Monhly Sock Reurn β 7 (STDEV) F-saisics and Overall Regression Model significance levels 8/691 Coefficien 0/176-0/029 0/187 0/213-0/004 0/207 0/007 0/186 Durbin-Wason Saisic 1/645 -saisic 2/371-1/886 7/007 3/293-1/758 3/494 1/057 1/129 Coefficien deerminaion 0/181 of Prob. 0/018 0/006 0/001 0/020 0/290 0/259 Adjused Coefficien of deerminaion 0/172 According o he firs hypohesis es resuls presened in Table 2, Durbin-Wason saisic is beween 1/5 and 2/5, which shows ha here is no a correlaion beween he componens of model error. Significance level of F-saisic () is lower han he acceped error level (5 percen) and he overall regression model is significan. The coefficien of deerminaion and he adjused coefficien of deerminaion also indicae ha he independen and conrol variables enered in he model, explain abou 18 percen of he variaions of he dependen variable. Given he lower probabiliy (Prob.) of -saisic han he level of accepable error rae for β 1 coefficien, es resuls showed ha audior repuaion and he cos of equiy capial are negaively relaed. Thus, he firs research hypohesis canno be rejeced a 99% confidence level. Firm size is also negaively relaed o he cos of equiy capial in 95% confidence level. The resuls also show ha he conrol variables enered he regression, sysemaic risk, leverage and he raio of book value o marke value have a posiive relaionship wih he cos of equiy capial a 99% confidence level, and a significan relaionship was no observed beween sales growh and monhly reurns deviaion wih he cos of equiy capial. The second research hypohesis and he model used: The second hypohesis saes: Clien size affecs he relaionship beween audior repuaion and he cos of equiy capial. The following mulivariae model is used o es he second hypohesis of he research: CoEC = C + β1( FEE ) + β2( SIZE ) + β3( SIZE * FEE) + β4( BETAi, ) + β5( LEV ) + β ( BM ) + β ( GRW ) + β8( STDEV ) 6 7 According o he firs hypohesis es resuls are presened in Table 2, Durbin-Wason saisic is beween 1/5 and 2/5, which shows ha here is no a correlaion beween he componens of model error. Significance level of F-saisic () is lower han he acceped error level (5 percen) and he overall regression model is significan. The coefficien of deerminaion and he adjused coefficien of deerminaion also indicae ha he independen and conrol variables enered in he model, explain abou 23 percen of he variaions of he dependen variable. Given he lower probabiliy (Prob.) of -saisic han he level of accepable error rae for β 3 coefficien, es resuls showed ha firm size has a posiive effec on he relaionship beween audior

7 2711 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: repuaion and he cos of equiy capial. Thus, he second research hypohesis canno be rejeced a 99% confidence level. Given he significan levels of β 1 and β 2 coefficiens, he resuls show ha firm size and audior repuaion negaively affec cos of equiy capial. The resuls also show ha from among he conrol variables enered he regression sysemaic risk; leverage and he raio of book value o marke value have a posiive relaionship wih he cos of equiy capial a 99% confidence level. A significan relaionship was no observed among oher conrol variables enered he model and cos of equiy capial. Table 3: Resuls of he second hypohesis Regression Tes Variable Name Variable Symbol Consan Value C Audior Repuaion β 1 (FEE) Firm Size β 2 (Size) Ineracion beween size and audior repuaion β 3 (Size*fee) Leverage β 4 (LEV) Risk β 5 (BETA) Book value-o-marke value β 6 (BM) Annual Growh β 7 (GRW) Monhly Sock Reurn β 8 (STDEV) F-saisics and Overall Regression Model significance levels 11/653 Coefficien 2/444-0/348-0/150 0/021 0/241 0/133 0/231 0/004 0/137 Durbin-Wason Saisic 1/664 -saisic 2/996-2/710-2/505 2/247 3/804 7/460 4/045 0/629 0/835 Coefficien of deerminaion 0/231 Prob. 0/002 0/006 0/012 0/025 0/529 0/404 Adjused Coefficien deerminaion 0/211 of Conclusions: According o he resuls of he firs hypohesis es, i can be saed ha audior repuaion and he cos of equiy capial are negaively relaed. Thus, he firs research hypohesis canno be rejeced a 99% confidence level. According o he resuls of he firs hypohesis es, if he firm owners use he mos famous professional audiors for firms audiing, heir cos of equiy capial will be reduced. The resuls of his heory corresponds o he resuls of oher researches done in his field, such as foreign researches done by di Angelo, Was and Zimmerman, New and Davidson, Clarkson and Simonich, Fernando e al and Smih and inernal researches done by Mojahedzade and Aghay Saghafi e al; The resuls of his hypohesis also does no correspond o he resuls of foreign researches done by Zhing Chang e al, Lee Jung e al and he resuls of inernal researches such as Sajjadi and ohers, Ahmadpoor and ohers and Shamizade. According o he resuls of he second hypohesis es, i can be saed ha clien (firm) size has always been one of he facors ha invesors ake ino consideraion when making decision o inves. So by enering firm size on he relaionship beween audior repuaion and he cos of equiy capial, i can be seen ha his variable affecs he relaionship beween hese wo crieria and leads o a posiive relaionship beween hese wo indices. Therefore, as invesors consider he firm size, i is beer o have a look a he inended firm s audi insiuion. On he oher hand, in order o reduce he audi coss and he cos of equiy capial, he firm managers should selec famous audi firms o audi heir financial saemen given he firm size hey are in. The resuls of his heory correspond o he resuls of oher researches done in his field, such as foreign researches done by di Angelo, Was and Zimmerman, New and Davidson, Clarkson and Simonich, Fernando e al and Smih and inernal researches done by Mojahedzade and Aghay Saghafi e al; The resuls of his hypohesis also does no correspond o he resuls of foreign researches done by Zhing Chang e al, Lee Jung e al and he resuls of inernal researches such as Sajjadi and ohers, Ahmadpoor and ohers and Shamizade. So, he relaionship beween audior repuaion and he cos of equiy capial (wih an emphasis on clien size)is invesigaed in his sudy. The resuls showed a negaive relaionship beween audior repuaion and he cos of equiy capial. And a posiive relaionship is observed enering firm size on he relaionship beween audior repuaion and he cos of equiy capial. So i can be saed ha he audior's repuaion as one of he audi qualiaive aribues can affec cos of equiy capial. Pracical Suggesions: 1. To selec he audi firm should no be confined only o he audi firm s famous name. Bu also audi service qualiy Insiue should also be considered. So an insiuion should be chosen ha is renowned for providing qualiy services. Increasing raining of specialized personnel, using highly educaed and experienced audiors in a paricular indusry of employer are facors ha affec he qualiy of audi services and he audi repor. 2. I is beer for invesors o assess he audi indices in financial saemens in order o make a righ decision on invesmen. And Firm managers should carefully selec exper and famous audiors in order o reduce firm coss and increase invesors confidence. 3. Audi organizaion as he esablisher of audiing sandards should consider he resuls of his sudy and oher relaed sudies and remind audi qualiy as he mos imporan parameer in predicing fuure decisions.

8 2712 Diar Ahmadzedeh Advances in Environmenal Biology, 7(10) Sepember 2013 Pages: Scienific recommendaions for fuure research: By conducing any research, a new pah will be opened up and is coninuous requires conducing furher researches. Thus, he researcher believes ha each of he following cases can be considered as proposed opics for sudy in fuure researches: 1. Impac of audi qualiy aribues on comparabiliy of financial saemens; 2. Relaionship beween audior repuaion and conservaism wih he cos of equiy capial; 3. Impac of audior repuaion and disclosure on he cos of equiy capial; and 4. Relaionship beween audi qualiy aribues and environmenal uncerainy. REFERENCES [1] HassasYeganeYahya, Ghanbarian Reza Audi qualiy from a heoreical and empirical poin of view, summer, Journal of Analyical Iranian Sociey of CPAs. [2] Osmani Mohamed Qasim, Idenificaion of capial cos models and effec of effecive facors on hem, PhD hesis, Tabaabai Universiy, Tehran, Iran. [3] Boosan, C., Disclosure level and he cos of equiy capial", The Accouning Review, 72(3): [4] Faemi Maryam, MA hesis, he effec of audior enure on audi qualiy, Alzahra Universiy, Tehran, Iran. [5] Mojahedzade Vida, Aghayi Parvin, Facors Affecing he Qualiy of Independen Audi from Independen audiors and users poin of view, Accouning and Audiing Review, 11(14). [6] Sadjjadi Sayyed Hussein, Ghorbani Ramin, The relaionship beween firm-specific aribues and heir annual adjusmens, Empirical Research in Financial Accouning / firs year, second ediion/ winer, pp: [7] Guy, D., Fernando, Ahmed M. Abdel-Meguid, Randal J. Elder, Audi qualiy aribues, clien size and cos of equiy capial, Review of Accouning and Finance. Emerald Group Publishing Limied, 9(4). [8] Zaini Embong, Norman Mohamad Saleh and Mohama Sabri Hassan, Firm size, disclosure and cos of equiy capial, Emerald Group Publishing Limied, Asian Review of Accouning, pp: [9] Yang, L Donald Sokes, Sephen Taylor, Leon Wong, Audi Qualiy, Accouning Aribues and he Cos of Equiy Capial, Deparmen of Accouning and Finance, Monash Universiy/ P O Box 197, Caulfield Eas [10] Jukka Karjalainen, Audi Qualiy and Cos of Deb Capial for Privae FirmsUniversiy of Easern Finland, Inernaional Journal of Audiing, In. J. Aud 15: [11] Khaleghi Moghadam Hamid, Ahmad Khanbeigi Musafa, The relaionship beween conservaism and imeliness of he firm s ne profi wih firm size and he size of he audi firm / Sudy of Accouning and Audiing, summer, 18(64). [12] Ahmadpoor Ahmed, Kashanipoor Muhammad, Shojaei Mohammad Reza, The effec of corporae governance and audi qualiy on he cos of deb financing (borrowing), Journal of Accouning and Audiing, 17(62): [13] Shamizade Mehd MA Thesis, he relaionship beween audi qualiy and capial cos and income qualiy/ Islamic Azad Universiy of Tabriz, Tabriz, Iran.