Public Accounting Firm Associations, Networks, and Alliances: Equipping Small Audit Firms with Big Resources

• In Event: Auditor Industry Specialization and Concentration

Abstract

In this study, we examine the benefits of membership in an accounting association, network, or alliance (collectively referred to as ‘an association’). Associations provide member firms with access to the expertise of professionals from other member firms, joint conferences and technical trainings, assistance in developing niche practices, the ability to overcome staffing and geographic limitations, and member referrals. We expect these benefits to lead to higher quality audits, higher audit fees (or audit fee premiums), and opportunities to provide nonaudit services to audit clients. Using hand-collected data on association memberships and a sample of smaller audit firm clients, we find that clients of member firms report less extreme absolute discretionary accruals and lower positive discretionary accruals than do clients of nonmember firms, suggesting that association member audit firms provide higher quality audits. We also find that audit fees and nonaudit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium for association membership and are willing to engage member auditors in additional nonaudit services. Our findings should be of interest to regulators when evaluating resource constraints at smaller audit firms because the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury recommended that regulators take actions to enable smaller audit firms to become viable suppliers of larger company audits (ACAP 2008) and our evidence suggests that association membership could be a possible mechanism by which smaller audit firms can overcome barriers to auditing larger audit clients. In addition, our findings should be of interest to audit committees when making auditor selection decisions.

Authors

• Kenneth L Bills, Colorado State University

• Lauren Dreher, University of Arkansas

• Linda Ann Myers, University of Arkansas