Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency.

This study examines the association between a shared common auditor among suppliers and customers and trade credit. Using hand-collected pairwise trade credit data, we find that a supplier extends more trade credit to a customer audited by a common auditor. This association is robust to alternative design specifications and various sample restrictions to alleviate selection bias. We then interview trade credit managers and executives as a prelude to archival analyses exploring multiple potential mechanisms to explain this association. The collective results are most consistent with the explanation that mutual third parties to a dyadic relationship can foster trust through social connections and increased salience of reputation effects rather than that a common auditor reduces information asymmetry about the rigor of the audit process. Data Availability: Data are available from the public sources cited in the text.