Big 4 Office Political Connections and Client Restatements

European Accounting Review, Forthcoming

51 Pages Posted: 2 Dec 2020 Last revised: 21 Sep 2021

See all articles by Anastasios Elemes

Anastasios Elemes

ESSEC Business School

Jeff Zeyun Chen

Texas Christian University

Date Written: November 18, 2020

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

Suggested Citation

Elemes, Anastasios and Chen, Jeff Zeyun, Big 4 Office Political Connections and Client Restatements (November 18, 2020). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3734162 or http://dx.doi.org/10.2139/ssrn.3734162

Anastasios Elemes (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

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