How Big-4 Firms Improve Audit Quality

Limei Che (), Ole-Kristian Hope () and John Christian Langli ()
Additional contact information
Limei Che: University of South-Eastern Norway, 3679 Notodden, Norway;
Ole-Kristian Hope: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3A6, Canada; BI Norwegian Business School, 0484 Oslo, Norway
John Christian Langli: BI Norwegian Business School, 0484 Oslo, Norway

Management Science, 2020, vol. 66, issue 10, 4552-4572

Abstract: This paper studies whether and how Big-4 firms provide higher-quality audits than non-Big-4 firms. Specifically, we first examine a Big-4 effect and then explore three sources of the Big-4 effect. To test the Big-4 effect, we use a unique data set of individual audit partners for a large sample of private companies and a novel research design exploiting the fact that auditees may follow the auditor who switches affiliation from a non-Big-4 firm to a Big-4 firm. Thus, we compare audit quality and audit fees of the same partner–auditee pairs before and after the switch. The results show that the Big-4 effect exists in the private-firm segment. More important, we find evidence for three sources of the Big-4 effect. First, Big-4 firms are able to recruit non-Big-4 partners who deliver higher audit quality than other non-Big-4 partners in the preswitch period. Second, enhanced learning has taken place after the switch. Third, the increased audit quality can also be attributed to stronger incentives/monitoring . These are new findings to the literature.

Keywords: Big-4 effect; auditing; audit quality; labor economics; learning; incentives; monitoring; auditor change; private firms; research design (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2019.3370 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:66:y:2020:i:10:p:4552-4572

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().