Does the Audit Market Price Big 4 Experience in Non-Big 4 Firms?

• In Event: Auditing 1

Abstract

This study examines whether non-Big 4 firms can command higher audit fees for the prior Big 4 experience of their audit partners. The study proposes that an individual auditor’s Big 4 experience by virtue of signaling higher quality reputation to stakeholders, allows the auditor to command higher audit fees even in a non-Big 4 firm. Results are consistent with expectations and indicate that there is an average audit fee premium of approximately 24 percent for partners with any Big 4 experience. Moreover, there is an average premium of approximately 1.4 percent for each 1 percent increase in the proportion of an office’s partners with Big 4 experience. This suggests that firms can “capture” office-wide the Big 4 reputation of their audit partners. The study provides evidence that a Big 4 reputation is not just a phenomenon particular to Big 4 firms themselves and that it is not lost at the individual level when auditors leave the Big 4. Rather, it continues to be perceived as valuable and priced as such into audit engagements as a whole by the audit market, both at the individual partner and the overall office levels.

Author

• Aleksandra B Zimmerman, Case Western Reserve University