Does office consulting service focuse influence audit quality

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 1: Audit Quality

Abstract

After the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years consulting/advisory service lines have seen a dramatic resurgence, and all of the firms have significantly grown their consulting practices. Accounting and auditing regulators have taken notice and expressed concern over the renewed focus on consulting by the large accounting firms. The accounting firms along with several leading professional organizations question these concerns, and in fact, suggest that such services may actually enhance audit quality. This study addresses this issue and examines whether having a strong consulting focus (i.e., tone at the top) impacts audit quality at the office level. The office level tone at the top is measured by comparing the number of CPA to non-CPA professionals for large accounting firms’ offices in the U.S.A. The results from the audit quality models suggest that a consulting tone-at-the-top office is not detrimental to audit quality. In fact, we find a positive association between the extent of consulting work performed in an office and the audit quality, as measured by a lower probability of restatements and lower earnings management. These results should be of interest to accounting regulators, firms, investors, and academics who share an interest in promoting audit quality in the current business environment.

Authors

• Albert L. Nagy, John Carroll University

• Matthew Sherwood, University of Massachusetts at Amherst

• Aleksandra B Zimmerman, Northern Illinois Universtiy