Big Five Audits and Accounting Fraud

57 Pages Posted: 27 May 2008

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Jeffrey Pittman

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

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.

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

JEL Classification: M49, G34, G32, H25

Suggested Citation

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

Clive Lennox (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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