Does the Audit Market Price Big 4 Experience in Non-Big 4 Firms?

• In Event: Auditing 1

Abstract

This study investigates whether Big 4 experience persists in non-Big 4 firms at the individual auditor level. In particular, I use hand-collected data to examine whether non-Big 4 firms command higher audit fees for the prior Big 4 experience of their audit partners. Drawing on credence goods theory and signaling theory, I posit that non-Big 4 auditors’ prior Big 4 experience, by virtue of signaling reputation for expertise to buyers and reducing uncertainty about audit quality, allows auditors to command higher audit fees. Results are consistent with expectations and indicate that there is an average audit fee premium of approximately 24 percent for partners with any prior Big 4 experience. Moreover, there is a premium of approximately 1.4 percent for each 1 percent increase in the proportion of an office’s partners with Big 4 experience. This suggests that firms can “capture” office-wide the Big 4 experience of their audit partners. The study provides evidence that a Big 4 reputation is not just a firm-level phenomenon; it persists at the individual level when auditors leave the Big 4 and transfer to non-Big 4 firms. Big 4 experience in non-Big 4 firms is perceived as valuable and priced as such by the audit market.

Author

• Aleksandra B Zimmerman, Case Western Reserve University