Does Big 4 Consulting Impair Audit Quality?

• In Event: Client Importance and Nonaudit Fees

Abstract

Over the past decade, the Big 4 public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services, primarily from nonaudit
clients. Regulators and the business press have expressed concerns about the potential implications of this increase for audit quality. We examine the relations between Big 4 accounting firm consulting revenues and various measures of audit quality, including auditor going concern reporting errors, client misstatements, client discretionary accruals, and the probability that clients meet or just beat analyst earnings forecasts. Overall, our results suggest that a higher proportion of consulting revenue to total revenue at the accounting firm level is not
associated with impaired audit quality; in fact, results of some tests suggest that a higher
proportion of consulting revenue is associated with improved audit quality. However, results of
earnings response coefficient tests suggest that investors perceive a deterioration in audit quality when a higher proportion of accounting firm revenue is generated from consulting services.

Authors

• Ling Lisic, George Mason University

• Linda Ann Myers, University of Arkansas

• Robert Pawlewicz, George Mason University

• Timothy Andrew Seidel, Utah State University