Do Big 4 Auditors Consistently Provide Better Audit Quality? Evidence from Government Audits

Exploiting the passage of the Sarbanes–Oxley Act (SOX) as an exogenous regulatory shock, we investigate whether board independence substitutes for external audit quality. Based on over 14,000 observations across 18 years, our difference-in-difference estimates show that firms forced to raise board independence are far less likely to employ a Big 4 auditor. In particular, board independence lowers the propensity to use a Big 4 auditor by approximately 38%. Firms with stronger board independence enjoy more effective governance and therefore do not need as much external audit quality as those with less effective governance do. Based on a natural experiment, our empirical strategy is far less vulnerable to endogeneity and is thus considerably more likely to show a causal effect, rather than merely an association.

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Audit Quality of Chinese ADR Engagements

Accounting Horizons ◽

10.2308/acch-51646 ◽

2016 ◽

Vol 31 (2) ◽

pp. 25-43 ◽

Cited By ~ 2

Author(s):

Aloke (Al) Ghosh ◽

Elisabeth Peltier ◽

Cunyu Xing

Keyword(s):

Audit Quality ◽

Emerging Market ◽

Financial Statements ◽

Foreign Firms ◽

American Depositary Receipts ◽

Reverse Mergers ◽

Chinese Companies ◽

Big 4 ◽

Depositary Receipts

SYNOPSIS The controversy over Chinese reverse mergers has led to concerns about the audit quality of all U.S.-listed Chinese companies. Because a sizeable number of foreign firms cross-list their shares as American Depositary Receipts (ADRs) issued by U.S. depositary banks (as opposed to direct listings), we study how auditors have managed their audits of Chinese ADRs. Our motivation for examining Chinese ADRs is based on the findings that cross-listing via the ADR process is beneficial for U.S. shareholders. We find that relative to ADRs from countries other than China, and relative to directly listed Chinese companies, Chinese ADRs are more likely to be associated with a Big 4 auditor and are less likely to restate prior-period financial statements. We also find that Chinese ADRs pay significantly higher fees than other emerging market ADRs and Chinese direct-listings. Collectively, these results suggest high audit quality for Chinese ADRs, which is in sharp contrast to the Chinese direct-listing results. Using Tobin's Q as a measure of market value, we find that the stock market rewards Chinese ADRs, indicating that investors incorporate the benefits of higher audit quality when evaluating Chinese ADRs.

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Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51571 ◽

2016 ◽

Vol 36 (2) ◽

pp. 1-19 ◽

Cited By ~ 5

Author(s):

Jeff P. Boone ◽

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Market Power ◽

Audit Quality ◽

Spatial Competition ◽

Spatial Location ◽

Audit Fees ◽

Audit Market ◽

Big 4 ◽

Audit Fee ◽

The Face ◽

Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

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Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-18-050 ◽

2020 ◽

Vol 39 (3) ◽

pp. 185-208

Author(s):

Qiao Xu ◽

Rachana Kalelkar

Keyword(s):

Market Share ◽

Audit Quality ◽

Type I ◽

Type I Errors ◽

Negatively Associated ◽

Going Concern ◽

Big 4 ◽

Office Market ◽

Going Concern Opinion ◽

Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

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Audit Firms as Networks of Offices

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51862 ◽

2017 ◽

Vol 37 (3) ◽

pp. 211-242 ◽

Cited By ~ 10

Author(s):

Scott E. Seavey ◽

Michael J Imhof ◽

Tiffany J. Westfall

Keyword(s):

Knowledge Management ◽

Knowledge Sharing ◽

Network Effects ◽

Audit Quality ◽

Discretionary Accruals ◽

Big 4 ◽

Audit Firms ◽

Network Connectedness ◽

Partner Knowledge ◽

Office Level

SUMMARY Prior audit research suggests that most, if not all, audit quality can be explained at the office level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning, and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impact office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.

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Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-52015 ◽

2018 ◽

Vol 38 (1) ◽

pp. 77-102 ◽

Cited By ~ 3

Author(s):

Matthew Baugh ◽

Jeff P. Boone ◽

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Service Provider ◽

Audit Quality ◽

Spillover Effect ◽

Audit Fees ◽

Data Availability ◽

Department Of Justice ◽

Big 4 ◽

Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

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Impact of audit tenure and audit rotation on the audit quality: Big 4 vs non big 4

Cogent Economics & Finance ◽

10.1080/23322039.2021.1901395 ◽

2021 ◽

Vol 9 (1) ◽

pp. 1901395

Author(s):

Dwi Martani ◽

Nur Aulia Rahmah ◽

Fitriany Fitriany ◽

Viska Anggraita

Keyword(s):

Audit Quality ◽

Big 4

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Corporate political connections, agency costs and audit quality

International Journal of Accounting and Information Management ◽

10.1108/ijaim-05-2016-0061 ◽

2016 ◽

Vol 24 (4) ◽

pp. 357-374 ◽

Cited By ~ 11

Author(s):

Arifur Khan ◽

Dessalegn Getie Mihret ◽

Mohammad Badrul Muttakin

Keyword(s):

Agency Costs ◽

Audit Quality ◽

Agency Cost ◽

Political Connections ◽

Political Connection ◽

Data Set ◽

Research Attention ◽

Content Type ◽

Big 4 ◽

The Relationship

Purpose The effect of political connections of agency costs has attracted considerable research attention due to the increasing recognition of the fact that political connection influences corporate decisions and outcomes. This paper aims to explore the association between corporate political connections and agency cost and examine whether audit quality moderates this association. Design/methodology/approach A data set of Bangladeshi listed non-financial companies is used. A usable sample of 968 firm-year observations was drawn for the period from 2005 to 2013. Asset utilisation ratio, the interaction of Tobin’s Q and free cash flow and expense ratio are used as alternative proxies for agency costs; membership to Big 4 audit firms or local associates of Big 4 firms is used as a proxy for audit quality. Findings Results show that politically connected firms exhibit higher agency costs than their unconnected counterparts, and audit quality moderates the relationship between political connection and agency costs. The results of this paper suggest the importance of audit quality to mitigate agency problem in an emerging economic setting. Research limitations/implications The findings of this paper could be of interest to regulators wishing to focus regulatory effort on significant issues influencing stock market efficiency. The findings could also inform auditors in directing audit effort through a more complete assessment of risk and determining reasonable levels of audit fees. Finally, results could inform financial statement users to direct investments to firms with lower agency costs. Originality/value To the knowledge of the authors, this study is one of the first to explore the relationship between political connection and agency costs, and the moderating effect of audit quality of this relationship.

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