Firm Type, Scope of Services, and Financial Reporting Reliability: Evidence From Non-Big 4 CPA Firms

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 10: Auditing and Financial Reporting Quality

Abstract

DeZoort and Taylor’s (2009) research suggests that nonpublic clients’ financial reporting reliability may be improved when regional CPA firms provides bookkeeping, payroll, and review services (nonindependent review, hereafter). The current research advances DeZoort and Taylor (2009) by designating the independent review engagement as a control group, and investigating whether the nonindependent review engagement improves perceptions of financial reporting reliability. This research also examines whether DeZoort and Taylor’s (2009) results may be extended to local CPA firms.

One hundred and one commercial lending officers respond to a between-subjects experiment, indicating that the independent review is superior to the nonindependent review, but only when regional firms provide the service (H1). However, lenders do not penalize companies’ use of independent local firms in the resulting loan decision. Lending officers also indicate that independent regional firms are more objective and provide more reliable financial reporting than independent local firms (H2a).

Finally, lending officers provide evidence from the within-subjects experiment that nonindependent regional firms, compared to nonindependent local firms, are less susceptible to economic bonding, have more expertise, and provide more reliable financial reporting (H2b). The results have implications for regulators interested in minimizing perceived differences in local and regional non-Big N CPA firm quality.

Author

• Reginald Wilson, Southern University