Journal Article

How Big-4 Firms Improve Audit Quality

Langli, John Christian, Hope, Ole-Kristian, Che, Limei

2020

Overview

This paper studies whether and how Big-4 firms provide higher-quality audits than non-Big-4 firms. Specifically, we first examine a Big-4 effect and then explore three sources of the Big-4 effect. To test the Big-4 effect, we use a unique data set of individual audit partners for a large sample of private companies and a novel research design exploiting the fact that auditees may follow the auditor who switches affiliation from a non-Big-4 firm to a Big-4 firm. Thus, we compare audit quality and audit fees of the same partner–auditee pairs before and after the switch. The results show that the Big-4 effect exists in the private-firm segment. More important, we find evidence for three sources of the Big-4 effect. First, Big-4 firms are able to recruit non-Big-4 partners who deliver higher audit quality than other non-Big-4 partners in the preswitch period. Second, enhanced learning has taken place after the switch. Third, the increased audit quality can also be attributed to stronger incentives/monitoring . These are new findings to the literature. This paper was accepted by Suraj Srinivasan, accounting .

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Accounting firms / Audit quality / Auditing / auditor change / Auditors / Audits / Big-4 effect / Closely held corporations / Companies / Fees & charges / incentives / labor economics / learning / Management research / monitoring / private firms / Professional fees / Research design