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

• In Event: Big N Quality Effects

Abstract

Whether Big N auditors provide higher quality audits than non-Big N auditors remains a debate. The self-selection between client firms and their auditors makes it difficult to attribute the differences in audit quality to the Big N effect instead of the underlying (often unobservable) client firm characteristics. Using Big N acquisitions of non-Big N auditors as a setting of exogenous auditor change, we find evidence that audit quality, measured as signed and unsigned discretionary accruals and financial statement divergence scores, improves for firms switching from non-Big N to Big N auditors. However, we find that the stock market does not respond positively to the auditor merger announcements, implying that the higher costs of hiring a Big N auditor offset the benefits of improved audit quality.

Authors

• Philip Wang, University of Florida

• John(Xuefeng) Jiang, Michigan State University

• Isabel Wang, Michigan State University