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

See all articles by R. Drew Sellers

R. Drew Sellers

Kent State University - Department of Accounting

Aleksandra Zimmerman

Northern Illinois University - Department of Accountancy

Timothy J. Fogarty

Case Western Reserve University - Department of Accountancy

Date Written: July 2, 2018

Abstract

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

Sellers, R. Drew and Zimmerman, Aleksandra and Fogarty, Timothy J., The Spillover Effect of Audit Firm Office Acquisition on the Audit Quality of the Existing Client Base (July 2, 2018). Available at SSRN: https://ssrn.com/abstract=3115591 or http://dx.doi.org/10.2139/ssrn.3115591

R. Drew Sellers

Kent State University - Department of Accounting ( email )

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

Aleksandra Zimmerman (Contact Author)

Northern Illinois University - Department of Accountancy ( email )

College of Business
DeKalb, IL 60115
United States

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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