Big 4 Office Political Connections and Client Restatements

Abstract

Extant literature suggests that audit firms establish political connections at the national level to lobby regulators and legislators. In this paper we construct a novel dataset of Big 4 auditors’ political connections at the audit office level and examine the implications of auditors’ political connections for their audit quality. We find that client firms of politically connected audit offices are less likely to restate their earnings. However, this relation is weaker for politically connected clients. Further analyses reveal that, during the years that are subsequently restated, connected clients of connected offices were able to contract for less audit effort and pay less audit fees relative to their non-connected counterparts. Our results, robust to alternative audit quality measures and endogeneity controls, suggest that, while connected auditors have incentives to deliver high audit quality, they are likely to compromise their independence for politically connected clients.

Keywords: Political connections, restatements, audit quality, audit office, Big 4, auditor independence, regulation

JEL Classification: D72, G18, G38, M40, M41, M42, M48