Big N Auditors and Audit Quality: New Evidence from Quasi-Experiments

• In Event: Audit Quality I

Abstract

Whether Big N auditors provide higher quality audits than non-Big N auditors remains a debate, because the self-selection between client firms and their auditors makes it difficult to attribute any differences in audit quality to the Big N auditors. Big N acquisitions of non-Big N auditors provide a setting of exogenous auditor change for the non-Big N auditors’ client firms. We identify a sample of 328 firms that switch to Big N auditors due to such auditor acquisitions. Using a difference-in-differences research design, we find that audit quality, measured as signed and unsigned discretionary accruals and financial statement divergence scores, improves for these firms switching from non-Big N to Big N auditors, although the likelihood of receiving going concern opinions or accounting misconduct does not change. Finally, we find no significant stock market reactions to the auditor acquisition announcements in our sample firms, implying that the higher costs of hiring a Big N auditor offset the benefits of improved audit quality.

Authors

• John ( Jiang, michigan state university

• Isabel Wang, Michigan State University

• Kailong Wang, Michigan State University