Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?

Posted: 27 Feb 2017 Last revised: 28 Apr 2018

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Seil Kim

Baruch College, City University of New York

K. K. Raman

The University of Texas at San Antonio

Date Written: February 24, 2017

Abstract

We examine the effects of the 1998 merger of Price Waterhouse (PW) and Coopers & Lybrand (CL) on the audit quality of the merged firm PricewaterhouseCoopers (PwC) at both the firm- and office-levels, where audit quality is surrogated by the auditor’s propensity to issue a going concern opinion, clients’ likelihood of meeting or beating analysts’ earnings forecasts, and clients’ accrual quality. At the firm-level, we find that the merger increased audit quality for PwC relative to the audit quality of the other Big N firms. At the office-level, our findings, albeit mixed, collectively suggest that the improvement in firm-level audit quality was likely driven by the improvement in audit quality at PwC’s overlapping offices, i.e., offices in cities where both PW and CL had separate offices prior to the merger. Further, our findings suggest that although the PW/CL merger increased auditor concentration in local audit markets with PwC overlapping offices, the merger improved (rather than hurt) audit quality in those markets. Overall, our study contributes to the extant sparse literature on the effect of Big N mergers on audit quality, and is of potential interest to regulators.

Keywords: Big N audit firm mergers; audit quality; overlapping office; office size

JEL Classification: L13, L51, M42, M48

Suggested Citation

Choi, Jong and Kim, Seil and Raman, K. K., Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality? (February 24, 2017). Contemporary Accounting Research (Summer 2017), 34(2): 1071-1102.. Available at SSRN: https://ssrn.com/abstract=2923194

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Seil Kim

Baruch College, City University of New York ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

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