The Spillover Effect of Audit Firm Office Acquisition on the Audit Quality of the Existing Client Base
39 Pages Posted: 21 Feb 2018 Last revised: 16 Jul 2018
Date Written: July 2, 2018
This study investigates accounting firm mergers and acquisitions (M&A) at the office level. It explores whether office M&A affect post-acquisition office audit quality, particularly whether there is a spillover effect on the preexisting client base of the acquiring office. We capitalize on a unique circumstance: the 2002 acquisition of Arthur Andersen (Andersen) practices by other audit firm offices. This setting involves a set of offices in each of the remaining large international audit firms that acquired Andersen practices (treatment group) and a set of offices that did not acquire Andersen practices (control group). Results of difference-in-difference analyses indicate that acquiring offices saw lower restatement risk and higher accruals quality as compared to non-acquiring offices. We find robust evidence of increased audit quality post-acquisition among the audits of preexisting clients of the acquiring offices. We, therefore, extend the literature by showing that higher audit quality in acquiring offices was not solely a result of more scrutiny placed on acquired Andersen clients but also a spillover effect on the existing client base. These findings extend the literature on office-level audit quality and on the spillover effects in auditing.
Keywords: Audit Firm Office Mergers and Acquisitions, Audit Reporting Lag, Restatements, Office Characteristics, Earnings Management, Arthur Andersen
JEL Classification: M42
Suggested Citation: Suggested Citation