Does the Big-4 Effect Exist in the Private-Client Segment? Evidence from Audit-Partner – Auditee Pair Switches
49 Pages Posted: 24 Aug 2016 Last revised: 12 Oct 2017
Date Written: October 11, 2017
This paper studies whether Big-4 firms provide higher quality audits relative to non-Big-4 firms in the private-firm segment when the pairs of audit partners and auditees are held constant. When an audit partner switches her affiliation with an audit firm to a different firm, auditees may follow the partner (hereafter, the partner-auditee pair). Employing a unique dataset of individual auditors for a large sample of private companies, we analyze audit quality of the partner-auditee pairs that switch affiliations between Big-4 and non-Big-4 firms. We proxy for audit quality using measures of earnings management, deviations from clean audit reports, and accuracy of going-concern reporting. Our evidence is consistent with a Big-4 effect. First, we document that Big-4 firms are able to attract non-Big-4 audit partners who deliver higher quality and charge higher audit fees than other non-Big-4 audit partners. Second, we find that these partners deliver audits of even higher quality at an even higher price after the switch. For switches from Big-4 firms to non-Big-4 firms, we find evidence of reduced audit quality.
Keywords: Big-4 effect, research design, audit quality, audit change, private firms
JEL Classification: G30, G34, J62, M10, M41, M42
Suggested Citation: Suggested Citation