The Audit Quality Effects of Small Audit Firm Mergers in the United States
55 Pages Posted: 26 Jul 2015 Last revised: 9 Oct 2018
Date Written: September 6, 2018
Increased audit regulation, coupled with practitioner reports of “hyper-acquisitive” behavior among smaller firms, creates a dynamic environment in which to assess changes in the U.S. audit market. Against this backdrop, we examine the consequences of small audit firm mergers on audit quality, a topic about which little is known. Using a quasi difference-in-differences research design, we find that among clients of audit firms involved in mergers, audit quality declines around merger events. Further, it appears that this decline in audit quality primarily comes from the acquiring firm’s legacy clients, suggesting the acquiring firms are distracted from maintaining the audit quality of their existing client base. To further refine our inferences, we estimate the determinants of being involved in a merger. We find that acquiring audit firms are ex-ante growing more quickly and operate in more competitive markets. We find evidence that these motivating factors moderate the effect of mergers on audit quality, but the direction and extent of these moderating effects are contingent on different proxies of audit quality. Taken together, our results provide evidence regarding the negative consequences of small audit firm mergers in the United States.
Keywords: Mergers, public company audit market, audit quality, audit regulation
JEL Classification: M42
Suggested Citation: Suggested Citation