The Big 4 Audit Report: Should the Public Perceive it as a Label of Quality?

32 Pages Posted: 14 May 2009

See all articles by Ross D. Fuerman

Ross D. Fuerman

Suffolk University - Department of Accounting

Michael Kraten

affiliation not provided to SSRN

Date Written: May 13, 2009

Abstract

There has been little research comparing the relative performance of the Big 4 CPA firms. Users of audited financial statements often practically have no other CPA firms to choose from for auditing services in the large public company auditing services market and thus desire more of this information. In 1017 financial reporting lawsuits against Big 5 auditees filed from 1999 through 2004, the auditor litigation outcomes are used to proxy for the likelihood of audit failure and thus for audit quality. Control variables significant in prior empirical work were used in polytomous regression and in logistic regression. Ernst & Young has comparatively better auditor litigation outcomes, which proxy for a lower likelihood of audit failure and a stronger level of audit quality. The Ernst & Young results are robust; they are insensitive to the use of ten different model specifications. There is also evidence suggesting that PricewaterhouseCoopers may be a comparatively high quality auditor, but these latter results are sensitive to the model specification. Clearly, the null hypothesis of consistency in audit quality among the Big 4 CPA firms is rejected.

Keywords: Audit quality, Private securities litigation, SEC enforcement actions, PCAOB enforcement actions, Criminal prosecutions

Suggested Citation

Fuerman, Ross D. and Kraten, Michael, The Big 4 Audit Report: Should the Public Perceive it as a Label of Quality? (May 13, 2009). Available at SSRN: https://ssrn.com/abstract=1404086 or http://dx.doi.org/10.2139/ssrn.1404086

Ross D. Fuerman (Contact Author)

Suffolk University - Department of Accounting ( email )

Sawyer Business School
Department of Accounting
Boston, MA 02108
United States
617-573-8615 (Phone)

HOME PAGE: http://www.suffolk.edu/business/faculty/12328.php

Michael Kraten

affiliation not provided to SSRN

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