Two-Sided Matching in the Audit Market

49 Pages Posted: 15 Feb 2018 Last revised: 12 Sep 2023

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: September 6, 2023

Abstract

We develop and estimate a two-sided matching model of clients with auditors. We find evidence that auditors and clients engage in matching based on their preferences for both observable and unobservable characteristics. This matching appears to partly explain 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. 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 (September 6, 2023). 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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