Breaking the Big Four brand’s halo effect precisely: evidence from the association between RMM coverage ratios and integrated audit effectiveness

Dong Drew Li (), Wenguang Lin, Pei-Yu Sun, Yunshu Tang and Zheng Cheng
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Dong Drew Li: McMurry University
Wenguang Lin: Western Connecticut State University
Pei-Yu Sun: South Dakota State University
Yunshu Tang: Hefei University of Technology
Zheng Cheng: University of Wisconsin - Milwaukee

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 3, No 13, 1328 pages

Abstract: Abstract This research examines what proportion of Big Four auditors underperform in integrated audit settings and why. Incorporating the inverse relation between detection risk and assessed risk of material misstatement (RMM) per the classic audit risk model, we create an RMM coverage ratio to measure how many times the total audit effort expended covers pre-existing RMM—the higher the ratio, the larger the margin for errors. We then partition the RMM coverage ratios in each industry into Deciles (0–9). Empirical analyses corroborate that, given the risk-based audit approach strictly executed, only the Big Four auditors of higher Deciles (2–9) increase the likelihood of integrated audit effectiveness. This evidence indicates that due to a small margin for errors (e.g., RMM coverage ratios ≤ 2.31), 20% of Big Four auditors are less likely to adequately assess or address risks to deliver an engagement, breaking the Big Four brand’s halo effect precisely.

Keywords: Halo effect; RMM coverage ratio; Margin for errors; The integrated audit; Risk-based audit approach; Partial mediation analysis (search for similar items in EconPapers)
JEL-codes: M40 M41 M42 M48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01238-0

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