Office Size of Big 4 Auditors and Client Restatements
Posted: 8 Sep 2012 Last revised: 3 Jul 2014
Date Written: September 7, 2012
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: Suggested Citation