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

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