How Can Small International Accounting Firms Improve Audit Quality? The Role of Accounting Associations and Networks

Abstract

Small (non-Big 4) accounting firms hold a substantial share of audit markets outside of the U.S. but few studies address factors that influence the quality of audits provided by these firms. We examine whether membership in an accounting association or network (AAN) allows small international accounting firms to provide higher audit quality. Using data from 24 countries, we find that audit quality improves after small international accounting firms join an AAN. Moreover, the improvement is more pronounced in countries with greater incentives for high audit quality, more competition, and a higher perceived value of the audit. These findings have important implications for regulators, managers, investors, accounting firms, and audit committees in international markets.

Keywords: international audit markets; accounting associations; accounting networks; audit quality; financial reporting quality; audit pricing

JEL Classification: M41, M42