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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

Limei Che

University College of Southeast Norway

Ole-Kristian Hope

University of Toronto - Rotman School of Management

John Christian Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics

Date Written: October 11, 2017

Abstract

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

Che, Limei and Hope, Ole-Kristian and Langli, John Christian, Does the Big-4 Effect Exist in the Private-Client Segment? Evidence from Audit-Partner – Auditee Pair Switches (October 11, 2017). Available at SSRN: https://ssrn.com/abstract=2828224 or http://dx.doi.org/10.2139/ssrn.2828224

Limei Che

University College of Southeast Norway

3603 Kongsberg, 3679
Norway

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

John Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics ( email )

N-0442 Oslo
Norway

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