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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Dong Drew Li & Wenguang Lin & Pei-Yu Sun & Yunshu Tang & Zheng Cheng, 2024. "Breaking the Big Four brand’s halo effect precisely: evidence from the association between RMM coverage ratios and integrated audit effectiveness," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1291-1328, April.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:3:d:10.1007_s11156-023-01238-0
    DOI: 10.1007/s11156-023-01238-0
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    More about this item

    Keywords

    Halo effect; RMM coverage ratio; Margin for errors; The integrated audit; Risk-based audit approach; Partial mediation analysis;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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