CPA-Firm Merger: An Investigation of Audit Quality
Posted: 21 Sep 2008 Last revised: 15 Jun 2011
Date Written: August 17, 2008
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: Suggested Citation