How Big-4 Firms Improve Audit Quality

56 Pages Posted: 24 Aug 2016 Last revised: 27 Feb 2019

See all articles by Limei Che

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: February 25, 2019

Abstract

This paper studies whether and how Big-4 firms provide higher quality audits than non-Big-4 firms. Specifically, we first examine a Big-4 effect and then explore three sources of the Big-4 effect. To test the Big-4 effect, we use a unique dataset of individual audit partners for a large sample of private companies and employ a novel research design exploiting the fact that auditees may follow the auditor who switches affiliation from a non-Big-4 to a Big-4 firm. Thus, we compare audit quality and audit fees of the same partner-auditee pairs before and after the switch. The results show that the Big-4 effect exists in the private-firm segment. More importantly, we find evidence for three sources of the Big-4 effect. First, Big-4 firms are able to recruit non-Big-4 partners who deliver higher audit quality than other non-Big 4 partners in the pre-switch period. Second, enhanced learning has taken place after the switch. Third, the increased audit quality can also be attributed to stronger incentives/monitoring. These are new findings to the literature.

Keywords: Big-4 effect, auditing, audit quality, labor economics, learning, incentives, monitoring, auditor change, private firms, research design

JEL Classification: G30, G34, J01, J24, J62, M10, M41, M42

Suggested Citation

Che, Limei and Hope, Ole-Kristian and Langli, John Christian, How Big-4 Firms Improve Audit Quality (February 25, 2019). 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 Christian Langli

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

N-0442 Oslo
Norway

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