CPA-Firm Merger: An Investigation of Audit Quality

Posted: 21 Sep 2008 Last revised: 15 Jun 2011

See all articles by Taychang Wang

Taychang Wang

National Taiwan University

Chiawen Liu

National Taiwan University - Department of Accounting

Chien-Heng Jennifer Chang

Tamkang University - Department of Accounting

Date Written: August 17, 2008

Abstract

It would be interesting to know how the theories and hypotheses in auditing developed for a mature economy work in an emerging market. This paper uses the merger of Diwan, Ernst & Young and J. T. Lai & Co., CPAs in Taiwan in 2000 as a target to study the effects of a CPA-firm merger on audit quality, measured by the discretionary accruals. Diwan, Ernst & Young and J. T. Lai & Co., CPAs belonged to Big 5 and non-Big 5 CPA firms in Taiwan respectively before they merged. The magnitudes of the increased size and reputation caused by the merger are different between the two firms. Therefore, we also analyze whether the merger has different effects on audit quality of these two firms. The empirical evidence shows that after the merger, the discretionary accruals of the two firms’ clients significantly decrease. In addition, the magnitude of the change is greater for the clients of J. T. Lai & Co., CPAs than for those of Diwan, Ernst & Young. The results are consistent with predictions of both size and reputation effect hypotheses.

Keywords: CPA-firm merger, audit quality, discretionary accruals

JEL Classification: M49, M41, M43, M47, G34

Suggested Citation

Wang, Taychang and Liu, Chiawen and Chang, Chien-Heng Jennifer, CPA-Firm Merger: An Investigation of Audit Quality (August 17, 2008). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1269486

Taychang Wang

National Taiwan University ( email )

50 Lane 144, Section 4
Taipei 32026
Taiwan
+886-2-2363-0231, ext. 2960 (Phone)
+886-2-2363-8038 (Fax)

Chiawen Liu (Contact Author)

National Taiwan University - Department of Accounting ( email )

50 Lane 144, Section 4
Roosevelt Road
Daan, Taipei 106
Taiwan
886-2-33661126 (Phone)
886-2-23638038 (Fax)

Chien-Heng Jennifer Chang

Tamkang University - Department of Accounting

No.151, Yingzhuan Rd., Danshui Dist.,
New Taipei, 251
Taiwan

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