David versus Goliath: The Relation Between Auditor Size and Audit Quality for U.K. Private Firms

European Accounting Review, Forthcoming

58 Pages Posted: 29 Jan 2018 Last revised: 23 Sep 2021

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Anastasios Elemes

ESSEC Business School

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: September 21, 2021

Abstract

We examine the relation between auditor size and audit quality for a sample of U.K. private firms. Private firms prioritize tax considerations over reducing information asymmetry in their financial reporting. We find that Big 4’s private clients exhibit higher levels of discretionary accruals and lower precision of accrual estimates than non-Big 4’s private clients. Although Big 4 auditors are less tolerant of income-increasing earnings management, they leave more room for downward earnings management and their private clients are able to engage in greater tax avoidance. These results are stronger for standalone firms than for business groups as the latter’s greater demand for stakeholder communication motivates Big 4 auditors to increase audit quality. Collectively, our evidence suggests that Big 4 auditors adjust audit quality in a more competitive segment of the audit market where client firms generally perceive the benefit from tax minimization to outweigh the cost of reduced earnings informativeness.

Keywords: Big 4, private firms, audit quality, tax planning

JEL Classification: H26, M41, M42

Suggested Citation

Chen, Jeff Zeyun and Elemes, Anastasios and Lobo, Gerald J., David versus Goliath: The Relation Between Auditor Size and Audit Quality for U.K. Private Firms (September 21, 2021). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3105917 or http://dx.doi.org/10.2139/ssrn.3105917

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Anastasios Elemes (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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