The Spillover Effect of Audit Firm Office Acquisition on the Audit Quality of the Existing Client Base

Accounting Horizons

47 Pages Posted: 21 Feb 2018 Last revised: 29 Apr 2021

See all articles by Ally Zimmerman

Ally Zimmerman

Florida State University - Department of Accounting

Amirali Moeini Chaghervand

Kent State University

R. Drew Sellers

Kent State University - Department of Accounting

Timothy J. Fogarty

Case Western Reserve University - Department of Accountancy

Date Written: April 29, 2021

Abstract

This study investigates accounting firm office mergers and acquisitions (M&A). It explores whether office M&A affect post-acquisition office audit quality, particularly whether there is a spillover effect on the existing client base of the acquiring office. We capitalize on a unique circumstance: the 2002 acquisition of Arthur Andersen (Andersen) office practices by other audit firm offices. This setting involves a set of offices in each of the remaining large international audit firms that acquired entire Andersen local practices (treatment group) and a set of offices that did not acquire Andersen practices (control group). Using a within-audit firm matched sample and difference-in-difference research design, we find robust evidence of higher audit quality post-acquisition among the audits of existing clients of the acquiring offices. These findings extend the literature on office audit quality and provide initial evidence of the impact of audit firm office M&A on the existing client base. The findings also suggest that practitioner and scholarly literature on audit practice mergers should consider the impact of audit firm M&A on the existing client base as well as the acquired clients.

Keywords: Audit Firm Office Mergers and Acquisitions, Restatements, Office Characteristics, Earnings Management, Arthur Andersen

JEL Classification: M42

Suggested Citation

Zimmerman, Aleksandra and Moeini Chaghervand, Amirali and Sellers, R. Drew and Fogarty, Timothy J., The Spillover Effect of Audit Firm Office Acquisition on the Audit Quality of the Existing Client Base (April 29, 2021). Accounting Horizons, Available at SSRN: https://ssrn.com/abstract=3115591 or http://dx.doi.org/10.2139/ssrn.3115591

Aleksandra Zimmerman (Contact Author)

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

Amirali Moeini Chaghervand

Kent State University ( email )

Kent, OH 44242
United States

R. Drew Sellers

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330 672 1123 (Phone)

Timothy J. Fogarty

Case Western Reserve University - Department of Accountancy ( email )

Cleveland, OH 44106-7235
United States
216-368-3938 (Phone)
216-368-4776 (Fax)

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