Do Global Audit Firm Networks Apply Consistent Audit Methodologies Across Jurisdictions? Evidence from Financial Reporting Comparability

Abstract

Brand name audit firms are global networks of local audit firms. These networks claim to enforce consistent audit methodologies across their member firms, which if true, should systematically affect client financial reporting. We find that clients from different countries have more (less) comparable accruals when they are audited by local audit firms from the same global network (different global networks). Furthermore, inferences are similar when we examine client accrual comparability around audit firm switches induced by the failure of Andersen, which serves as a shock that helps improve identification. In falsification tests, having auditors from the same global network is not associated with differences in operating cash flows. Results also suggest that the role of global network methodologies in global financial reporting comparability is more pronounced across stronger investor protection jurisdictions and across jurisdictions that have adopted International Standards on Auditing.

Keywords: Audit Firm Networks, Comparability, Investor Protection, ISAs

JEL Classification: M41, M42