Does Audit Firm Size Matter? The Effect of Audit Firm Size Measured by Audit Firm Revenues, Number of Offices, and Professional Headcounts on Audit Quality and Audit Fees

Abstract

Using audit firm size measured by audit firm revenues, the number of offices, and professional headcounts, we find that audit firm size measured as continuous variable is positively associated with engagement-level audit quality proxied by discretionary accruals and modified opinions, and is also positively associated with audit fees. The Big 4 audit firms differ considerably in size and their size also measured by revenues, the number of offices, and professional headcounts is significantly associated with the audit quality and audit fee differences across Big 4 auditors. However, we find only limited evidence of the hypothesized relation between associate-to-partner ratio (i.e., human capital leverage) and audit quality, and find no evidence that associate-to-partner ratio is associated with audit fees.

Keywords: Audit firm size, Associate-to-partner ratio, Audit quality, Audit fees, The Big 4/non-Big 4 audit firms

JEL Classification: M4, M42