Two-Sided Matching in the Audit Market

56 Pages Posted: 15 Feb 2018 Last revised: 11 Feb 2022

See all articles by Ken Li

Ken Li

McMaster University - Michael G. DeGroote School of Business

Maureen F. McNichols

Stanford University

Aneesh Raghunandan

London School of Economics

Date Written: February 10, 2022

Abstract

We estimate a two-sided matching model of firms with auditors. Doing so allows us to separate the effects of sorting from influence in the audit market and identify the effect that each has on observed audit quality. We find evidence that auditors and clients engage in assortative matching based on inherent client quality. This assortative matching appears to explain much of the “Big 4” effect on several common audit outcomes; after controlling for the effects of matching, we find no evidence of auditor influence on the likelihood of a restatement, as well as mixed evidence on whether Big 4 auditor presence affects serious comment letter conversations with the SEC. We find that selection appears to have less of an effect on the likelihood of internal control weaknesses. Collectively, our results highlight the importance of accounting for two-sided matching between auditors and clients in understanding the influence of auditors on clients’ financial reporting practices.

Keywords: audit quality, two-sided matching, auditor selection

JEL Classification: M42

Suggested Citation

Li, Ken and McNichols, Maureen F. and Raghunandan, Aneesh, Two-Sided Matching in the Audit Market (February 10, 2022). Available at SSRN: https://ssrn.com/abstract=3117828 or http://dx.doi.org/10.2139/ssrn.3117828

Ken Li

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Aneesh Raghunandan (Contact Author)

London School of Economics ( email )

United Kingdom

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