Growing Pains: Audit Quality and Office Growth

Posted: 15 Dec 2012 Last revised: 15 Mar 2016

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy

Robert Lowell Whited

North Carolina State University

Date Written: May 1, 2014

Abstract

This study provides evidence on how local office growth affects audit quality. We predict that significant recent growth will temporarily stress office resources, leading to a negative relation between office-level growth and audit quality. To test this prediction, we examine a sample of 17,062 firm-year observations from 2005-2010. Results indicate a consistent negative relation between changes in volume of audit work and audit quality. Specifically, clients of offices that experience increases in workload over the prior year have greater absolute discretionary accruals as well as an increased likelihood of restatement. Our tests also indicate that the effect of office growth is transient and vanishes after one year. We find limited evidence that the size of the auditor’s national network of offices partially mitigates the negative effects of office growth on audit quality. We further show that proxies for audit quality are negatively related to office-level growth from new and existing clients. These findings are robust to controls for client and auditor characteristics as well as alternative specifications of growth. Taken together, evidence indicates that while larger offices provide higher audit quality, the benefits of office size are not realized immediately and rapid growth temporarily impairs audit quality. These results are informative to regulators concerned with audit quality and to practitioners charged with adjusting to office growth.

Keywords: Audit Quality, Office Growth, Restatements, Abnormal Accruals

Suggested Citation

Bills, Kenneth L. and Swanquist, Quinn Thomas and Whited, Robert Lowell, Growing Pains: Audit Quality and Office Growth (May 1, 2014). Contemporary Accounting Research, Volume 33, Issue 1, pages 288–313, Spring 2016. Available at SSRN: https://ssrn.com/abstract=2184467 or http://dx.doi.org/10.2139/ssrn.2184467

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Quinn Thomas Swanquist

University of Alabama - Culverhouse School of Accountancy ( email )

Tuscaloosa, AL 35487
United States

Robert Lowell Whited (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695
United States

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