Office Size of Big 4 Auditors and Client Restatements

Posted: 8 Sep 2012 Last revised: 3 Jul 2014

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Paul N. Michas

University of Arizona - Eller College of Management

Michael D. Yu

State University of West Georgia

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2012

Abstract

Francis and Yu (2009) and Choi, Kim, Kim, and Zang (2010) report evidence that Big 4 audits are of higher quality when the engagement office is of larger size: specifically, client earnings quality is higher and auditors in larger offices are more likely to issue going concern audit reports. We extend this line of research to test if larger Big 4 offices have fewer client restatements. A client restatement provides more direct evidence of a low-quality audit than earnings quality metrics or going concern reports, because a restatement indicates the client’s auditor did not effectively enforce the correct application of GAAP at the time the original financial statements were issued. We analyze 2,557 firm-year restatements in a sample of 23,190 financial statements originally issued by U.S. firms in 2003-2008. We find that Big 4 office size is associated with fewer client restatements after controlling for innate client characteristics that may affect restatements (client size, financial performance, industry membership, non-financial measures, off-balance sheet activities, and market-related measures), and a set of controls for other auditor factors such as fees and industry expertise. The study raises important questions about the ability of smaller offices to deliver high-quality audits for SEC registrants.

Keywords: audit office, office size, restatements, Big 4

JEL Classification: M40, M41

Suggested Citation

Francis, Jere R. and Michas, Paul N. and Yu, Michael D., Office Size of Big 4 Auditors and Client Restatements (September 7, 2012). Contemporary Accounting Research 30 (4): 1626-1661. Available at SSRN: https://ssrn.com/abstract=2143378

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Paul N. Michas (Contact Author)

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

Michael D. Yu

State University of West Georgia ( email )

1601 Maple St
Carrollton, GA 30118
United States
6788396517 (Phone)

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