The Emergence of Second-Tier Auditors in the US: Evidence from Investor Perceptions of Financial Reporting Credibility

Journal of Business Finance and Accounting, Forthcoming

Posted: 17 Oct 2007 Last revised: 10 Jan 2013

Cory A. Cassell

University of Arkansas

Gary Giroux

Texas A&M University - Department of Accounting

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2013

Abstract

We examine changes in the association between auditor type (Big 4, Second-Tier, and Other non-Big 4) and perceived financial reporting credibility in the wake of events (e.g., Andersen’s failure, the implementation of SOX, creation of the PCAOB, etc.) which led to significant growth in Second-Tier client portfolios and increased scrutiny of Second-Tier audit practices. Our results reveal that financial reporting credibility of Second-Tier clients was lower than that of Big 4 clients and was indistinguishable from that of Other non-Big 4 clients pre-Andersen. However, post-Andersen, we find that financial reporting credibility of Second-Tier clients is higher than that of Other non-Big 4 clients and is indistinguishable from that of Big 4 clients. We expect that our results will be of interest to regulators, both in the United States and in the European Union, who have expressed concerns about the current state of competition in the audit market, management and boards of directors that are contemplating switching to a Second-Tier audit firm, and academics investigating quality differences among audit firm types.

Keywords: Second-Tier auditors, Big N auditors, ex ante cost of equity capital, PEG ratio, earnings response coefficients, ERC, financial reporting credibility

JEL Classification: M49, M41, G12, G38, G19, L84

Suggested Citation

Cassell, Cory A. and Giroux, Gary and Myers, Linda A. and Omer, Thomas C., The Emergence of Second-Tier Auditors in the US: Evidence from Investor Perceptions of Financial Reporting Credibility (January 9, 2013). Journal of Business Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1111720 or http://dx.doi.org/10.2139/ssrn.1111720

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Gary A. Giroux

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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