Non-Big 6 Audit Firms’ Access to External Resources Through Inter-Organizational Relationships (IORs)

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Abstract

Small audit firms try to reduce their resource constraints in serving clients by engaging in inter-organizational relationships (IORs) through accounting networks or contractual agreements with individual firms. They have access to audit manuals and personnel and perform joint audits and marketing of their audit services through IORs. We utilize a novel dataset created from the PCAOB Form 2 from 2010 to 2018 where audit firms are required to report such relationships and specific resources they have utilized through such IORs. We document that while audit fees are significantly higher for audit firms participating in IORs, audit quality is not significantly improved, consistent with the legitimacy theory. Audit quality is improved when audit firms have access to audit manuals and technologies through IORs and it is not affected by access to employees of other audit firms, suggesting that audit quality differs depending on what types of resources firms utilize through IORs. The findings have practical implications for both regulators who look for ways to help small audit firms compete in the audit market and small audit firms who search for ways to reduce their resource constraints.

Authors

• Jeff Boone, University of Texas-San Antonio

• Lele Chen, University of Texas-San Antonio

• Juan Mao, University of Texas-San Antonio