Auditor Offices and the Comparability and Quality of Clients' Earnings
60 Pages Posted: 16 Oct 2014
Date Written: October 14, 2014
This study examines the role of the local auditor office in the comparability and quality of their clients' earnings. I construct of sample of firm-pairs in which each observation consists of two firms in the same industry-year. Accounting comparability is inferred by the closeness of total accruals between two firms in each firm-pair. I find that firm-pairs audited by the same local auditor office have more comparable earnings, on average, than firm-pairs audited by either the same Big 4 auditor but different local auditor offices or by different Big 4 auditors. This finding suggests that the application of a local auditor office style increases the comparability of client earnings. I also examine the association between comparability and average earnings quality in firm-pairs. Based on abnormal accruals, I find that firm-pairs with lower accounting comparability have lower average earnings quality. I also find that firm-pairs audited by the same local auditor office have greater average earnings quality. Overall, the results documented here provide further evidence of the role of the auditor as an economic agent promoting increased financial statement comparability in client earnings, as well as the benefits of increased comparability between firms as manifested in the quality of their earnings.
Keywords: comparability, earnings quality, Big 4 auditor offices
JEL Classification: M40, M41, M49
Suggested Citation: Suggested Citation