Audit Firm and Audit Partner Style in Non-Big 4 Firms

Abstract

Approximately half of U.S. non-Big 4 audit clients have audit partners with prior work experience at Big 4 firms but little is known about the effects of these types of auditors. We examine how the Big 4 style of former Big 4 auditors affects the financial statement comparability of non-Big 4 audit firm clients and how this Big 4 auditor style interacts with non-Big 4 audit firm-level style. Our study has three principal findings: One, we find the persistence of a Big 4 style among non-Big 4 partners with former Big 4 experience. Two, we find that annually inspected non-Big 4 firms have their own firm-level styles. Three, we compare the effect of a partner Big 4 style and a non-Big 4 firm-level style and find that the former Big 4 auditor style effect is partially offset by the firm-level style of annually inspected non-Big 4 firms. Our results provide novel evidence on the ways in which auditors foster financial statement comparability apart from the current audit firm’s unique audit methodologies. Unlike prior literature, we provide evidence that larger, annually inspected non-Big 4 firms have their own style which is offset by the Big 4 style of their audit partners with former Big 4 experience. While prior literature on both audit partner and firm style focuses on Big 4 firms, we extend the limited literature on the role of auditors in client financial statement comparability in non-Big 4 firms, which audit more than half of U.S. publicly traded companies.

Keywords: financial statement comparability, auditor style, non-Big 4 audit firms, Big 4 experience, audit partners

JEL Classification: M42