Can Big 4 Versus Non-Big 4 Differences in Audit-Quality Proxies be Attributed to Client Characteristics?

Posted: 16 Jul 2010 Last revised: 21 Aug 2011

See all articles by Alastair Lawrence

Alastair Lawrence

London Business School / University of California, Berkeley

Miguel Minutti-Meza

University of Miami - Department of Accounting

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: June 16, 2010

Abstract

This study examines whether differences in proxies for audit-quality between Big 4 and non-Big 4 audit firms could be a reflection of their respective clients’ characteristics. In our analyses, we use three audit-quality proxies: discretionary accruals, the ex ante cost of equity capital, and analyst forecast accuracy, and employ propensity-score and attribute-based matching models in attempt to control for differences in client characteristics between the two auditor groups while estimating the audit-quality effects. Using these matching models, we find that the effects of Big 4 auditors are insignificantly different from those of non-Big 4 auditors with respect to the three audit-quality proxies. Our results suggest that differences in these proxies between Big 4 and non-Big 4 auditors largely reflect client characteristics, and more specifically client size. We caution the reader that this study has not resolved the question, though we hope that it encourages other researchers to explore alternative methodologies that separate client characteristics from audit-quality effects.

Keywords: Big 4 Versus Non-Big 4 Audit Quality, Discretionary Accruals, Ex Ante Cost of Equity Capital, Analyst Forecast Accuracy, Propensity-Score Matching, Attribute-Based Matching

Suggested Citation

Lawrence, Alastair and Minutti-Meza, Miguel and Zhang, Ping, Can Big 4 Versus Non-Big 4 Differences in Audit-Quality Proxies be Attributed to Client Characteristics? (June 16, 2010). Accounting Review, Vol. 86, No. 1, pp. 259-288. Available at SSRN: https://ssrn.com/abstract=1640111

Alastair Lawrence

London Business School / University of California, Berkeley ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

Miguel Minutti-Meza

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6287 (Phone)

Ping Zhang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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