Big N Auditors and Audit Quality: New Evidence from Quasi-Experiments

59 Pages Posted: 13 Mar 2018

See all articles by John (Xuefeng) Jiang

John (Xuefeng) Jiang

Michigan State University

Isabel Yanyan Wang

Michigan State University

K. Philip Wang

Fisher School of Accounting, University of Florida

Multiple version iconThere are 2 versions of this paper

Date Written: March 13, 2018

Abstract

Whether Big N auditors provide higher quality audits than non-Big N auditors remains a debate. Big N acquisitions of non-Big N auditors provide a unique setting of exogenous shocks to the acquired non-Big N auditors’ client firms because they have to change auditors. We identify a sample of 331 treatment firms that switched to Big N auditors due to such Big N acquisitions. Using a difference-in-differences research design, we find that after these treatment firms switch to Big N auditors, they have improved audit quality as measured through signed and absolute discretionary accruals, and financial statement divergence scores. In contrast, we find that mergers or acquisitions among non-Big N auditors have little impact on the audit quality of their affected client firms. Further cross-sectional analyses suggest the improvement in audit quality is likely due to Big N auditors’ general competence rather than their industry-specific expertise. Finally, we find no significant stock market reactions in the treatment firms around the announcements of Big N acquisitions, indicating that the capital markets may not attach any premium to improved audit quality associated with hiring a Big N auditor.

Suggested Citation

Jiang, John (Xuefeng) and Wang, Isabel and Wang, Philip, Big N Auditors and Audit Quality: New Evidence from Quasi-Experiments (March 13, 2018). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3139642

John (Xuefeng) Jiang (Contact Author)

Michigan State University ( email )

632 Bogue St Ste N505
Eli Broad College of Business
East Lansing, MI 48824
United States
517-432-3031 (Phone)
517-432-1101 (Fax)

HOME PAGE: http://sites.google.com/view/johnjiang

Isabel Wang

Michigan State University ( email )

N233 Business Complex
Broad School of Business
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.msu.edu/~wangyany/

Philip Wang

Fisher School of Accounting, University of Florida ( email )

Gainesville, FL 32611-7166
United States

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