Audit Quality Effects of Joining an International Audit Firm Network

• In Event: Audit Firm Knowledge Sharing

Abstract

This study examines whether admittance into an international audit firm network affects audit quality. Using a sample of 21 acquisitions into the international networks of Grant Thornton or BDO across 11 countries from 2001 to 2013, we find evidence that absolute abnormal accruals and income-increasing abnormal accruals become smaller for clients of acquired audit firms after the audit firm joins an international audit firm network. We also find no difference for abnormal accruals of existing clients of the acquiring audit firm over the same timeframe, suggesting that the abnormal accrual decreases for acquired clients are due to improvements in audit quality from joining the international network. Additional evidence suggests that investors perceive audit quality to increase when firms join an international audit firm network. Overall, results provide evidence that audit quality increases when audit firms join international audit firm networks, which should be of interest to investors, clients, and regulators.

Authors

• Matthew Stephen Ege, Texas A&M University

• Paul N Michas, University of Arizona-Tucson

• Dechun Wang, Texas A&M University