Do Big 4 Auditors Provide Higher Audit Quality after Controlling for the Endogenous Choice of Auditor?

Abstract

Recent research suggests that Big 4 auditors do not provide higher audit quality than other auditors, after controlling for the endogenous choice of auditor. We re-examine this issue using the incidence of accounting restatements as a measure of audit quality. Using a propensity score matching procedure similar to that used by recent research to control for clients’ endogenous choice of auditor, we find that clients of Big 4 audit firms are less likely to subsequently issue an accounting restatement than are clients of other auditors. In additional tests, we find weak evidence that clients of Big 4 auditors are less likely to issue accounting restatements than are clients of Mid-tier auditors (Grant Thornton and BDO Seidman). Taken together, the evidence suggests that Big 4 auditors do perform higher quality audits.

Keywords: Big 4 Auditor, Audit Quality, Propensity-score matching, Audit Quality Proxies.

JEL Classification: M41, M42.