Closing the Gap: Second Tier Auditors, First Tier Quality?

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 7: Audit Markets

Abstract

This study investigates changes in audit quality provided by Second Tier auditors relative to other auditors over time. We predict that the Sarbanes-Oxley Act, increased regulatory scrutiny, and subsequent growth of Second Tier auditors’ client portfolios has led to a relative increase in the audit quality provided by Second Tier auditors. To test this prediction, we examine a sample of firms over the period 1996–2010. Specifically, we isolate those companies that Second Tier auditors are reasonably equipped to audit. Results indicate that audit quality provided by Second Tier auditors has increased over the period during and post-SOX. Our analysis indicates that Second Tier firms have closed the ‘gap’ in audit quality with larger firms. Additionally, using this subsample of companies, Second Tier firms are associated with higher quality audit services relative to Big N firms in the post-SOX period. These findings are generally robust to several specifications and alternative analyses.

Authors

• Quinn Thomas Swanquist, The University of Tennessee–Knoxville

• Robert Lowell Whited, The University of Tennessee–Knoxville

• Jonathan Edward Shipman, The University of Tennessee