Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

Posted: 17 Jan 2014 Last revised: 13 Jul 2017

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Lauren M. Cunningham

University of Tennessee - Haslam College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: July 20, 2015

Abstract

In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as ‘an association’). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

Keywords: associations, networks, small audit firms, audit quality, audit fees

JEL Classification: M41

Suggested Citation

Bills, Kenneth L. and Cunningham, Lauren M. and Myers, Linda A., Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees (July 20, 2015). The Accounting Review, Vol. 91, No. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2379678 or http://dx.doi.org/10.2139/ssrn.2379678

Kenneth L. Bills

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

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

Lauren M. Cunningham

University of Tennessee - Haslam College of Business ( email )

Accounting and Information Management
603 Stokely Management Center
Knoxville, TN 37996
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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