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Big Five Audits and Accounting Fraud

Clive S. Lennox

University of Southern California

Jeffrey Pittman

Memorial University of Newfoundland (MUN) - Faculty of Business Administration

May 2008

We examine the association between Big Five audits and the incidence of accounting frauds allegedly committed by U.S. public companies between 1981 and 2001. Many commentators argue that the prominent financial reporting failures that led to major corporate governance reforms cast serious doubt on whether the large public accounting firms continue to supply higher-quality audits, especially in recent years. However, in unmatched and industry-size-year matched samples, we provide strong, robust evidence that fraudulent financial reporting becomes less likely with the presence of a Big Five auditor. Importantly, time-series tests suggest that the Big Five are consistently associated with a lower incidence of fraudulent accounting, including in the last five years of our sample period when the number of frauds soared. Moreover, we find evidence implying that these relations are causal rather than an artifact of endogeneity in auditor choice.

Number of Pages in PDF File: 57

Keywords: corporate governance, Big Five audits, agency costs, accounting fraud

JEL Classification: M49, G34, G32, H25

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Date posted: May 27, 2008  

Suggested Citation

Lennox, Clive S. and Pittman, Jeffrey, Big Five Audits and Accounting Fraud (May 2008). Available at SSRN: http://ssrn.com/abstract=1137829 or http://dx.doi.org/10.2139/ssrn.1137829

Contact Information

Clive Lennox (Contact Author)
Hong Kong University of Science & Technology (HKUST) ( email )
Clive Lennox
University of Southern California ( email )
Los Angeles, CA 90089
United States
Jeffrey A. Pittman
Memorial University of Newfoundland (MUN) - Faculty of Business Administration ( email )
St. John's, Newfoundland A1B 3X5
709-737-3100 (Phone)
709-737-7680 (Fax)
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References:  67
Citations:  14

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