Big-4 auditors and audit quality: a novel firm life-cycle approach

Sonali Jain and Sobhesh Kumar Agarwalla

Meditari Accountancy Research, 2022, vol. 31, issue 5, 1436-1452

Abstract: Purpose - Firm-specific factors such as size, profitability, growth, risk and complexity, in addition to agency-related issues determine both auditor selection and firm life-cycle stage. This paper aims to examine whether and how the effect of Big-4 auditors (B4As) on client firms’ audit quality varies across firms’ life-cycle stages. Design/methodology/approach - The sample comprises 1,813 firm-year observations in India’s emerging economy from 2011 to 2020. The Modified Jones model and Jones (signed, unsigned) model are used to compute discretionary accruals/audit quality. The authors use Kohet al.’s (2015) methodology to determine the firm life cycle. Findings - The authors’ key findings show that the client firms employing B4As have superior audit quality than those employing non-Big-4 auditors (NB4As). The authors also show that the life-cycle stage significantly impacts the relationship between B4As and a firm’s audit quality. Furthermore, B4A client firms report superior audit qualityvis-à-visNB4A firms only in the birth- and decline-stages. The audit quality of growth- and mature-stage B4A and NB4A client firms is not significantly different. Practical implications - Implications for managers include the decision to hire B4As. Given that B4As earn a significant fee premium, managers leading birth- and decline-stage firms should hire B4As, while managers of growth- and mature-stage firms should not. Originality/value - To the best of the authors’ knowledge, this is the first paper to examine the moderating effect of the firm life-cycle stage on the selection of B4As and their impact on audit quality.

Keywords: India; Discretionary accruals; Audit quality; Big 4 affiliates; Firm life cycle (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:medarp:medar-06-2021-1344

DOI: 10.1108/MEDAR-06-2021-1344

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