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Audit Quality and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypotheses

Author

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  • Clive S. Lennox

    (Department of Economics, Bristol University.)

Abstract

Empirical studies have shown that large auditors are more accurate than small auditors. The reputation hypothesis states that large auditors have more incentive to be accurate because an inaccurate report may lead to a loss of client-specific rents (DeAngelo, 1981). The deep pockets hypothesis states that large auditors should be more accurate because they have greater wealth at risk from litigation (Dye, 1993). This paper presents evidence on the relationship between auditor size and litigation and on the market shares of criticised and uncriticised auditors - the findings give greater support to the deep pockets hypothesis than the reputation hypothesis. Copyright Blackwell Publishers Ltd 1999.

Suggested Citation

  • Clive S. Lennox, 1999. "Audit Quality and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypotheses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7&8), pages 779-805.
  • Handle: RePEc:bla:jbfnac:v:26:y:1999-09:i:7&8:p:779-805
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    Cited by:

    1. Numata, Shingo & Takeda, Fumiko, 2010. "Stock market reactions to audit failure in Japan: The case of Kanebo and ChuoAoyama," The International Journal of Accounting, Elsevier, vol. 45(2), pages 175-199, June.
    2. Dennis M. Lopez & Pamela C. Smith, 2010. "Auditor Type and Audit Quality Differences in Nonprofit Healthcare Organizations – U.S. Evidence," Working Papers 0107, College of Business, University of Texas at San Antonio.
    3. repec:taf:acctbr:v:31:y:2001:i:4:p:291-311 is not listed on IDEAS
    4. Augustine O. Okolie Ph.D, FCA, 2014. "Audit Firm Size and Market Price Per Share of Quoted Companies in Nigeria," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 4(5), pages 100-117, May.
    5. Pei-Gi Shu & Tsung-Kang Chen & Wen-Jye Hung, 2015. "Audit duration quality and client credit risk," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 22(2), pages 137-162, June.
    6. Katsuhiko Muramiya & Tomomi Takada, 2010. "Auditor Conservatism, Abnormal Accruals, and Going Concern Opinions," Discussion Papers 2010-64, Kobe University, Graduate School of Business Administration.
    7. repec:pdc:jrnbeh:v:14:y:2018:i:2:p:355-374 is not listed on IDEAS
    8. repec:taf:applec:v:49:y:2017:i:48:p:4833-4850 is not listed on IDEAS
    9. Ines Maraghni & Mehdi Nekhili, 2017. "Audit committee characteristics and audit fees: Evidence from France
      [Caractéristiques du comité d’audit et honoraires d’audit : cas des entreprises françaises]
      ," Post-Print hal-01907594, HAL.
    10. Seiyed Alireza Mousavi & Behnoosh Aghaee Daneshvar, 2012. "An Investigation of Relationship between Audit Quality and Investment Opportunities in Tehran Stock Exchange (TSE)," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(4), pages 1-17, October.
    11. repec:eee:reacre:v:25:y:2013:i:2:p:185-195 is not listed on IDEAS
    12. Serge Evraert & Stéphane Trebucq, 2003. "Crise De Confiance Et Information Comptable : Une Etude Empirique Des Reactions Du Marche Français A L'Annonce Des Affaires Enron Et Worldcom," Post-Print halshs-00582775, HAL.
    13. Hu, Shing-yang & Lin, Yueh-Hsiang & Lai, Christine W., 2016. "The effect of overvaluation on investment and accruals: The role of information," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 181-201.
    14. Seyed Mahmoud Hosseinniakani & Helena Inacio & Rui Mota, 2014. "A Review on Audit Quality Factors," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 243-254, April.
    15. Riadh Manita, 2009. "La qualité du processus d'audit : une étude empirique sur le marché financier tunisien," Post-Print halshs-00455733, HAL.
    16. repec:eee:reacre:v:20:y:2008:i:c:p:177-185 is not listed on IDEAS
    17. Jerry Sun & Guoping Liu, 2011. "Client-specific litigation risk and audit quality differentiation," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 300-316, April.
    18. repec:eee:jiaata:v:23:y:2014:i:1:p:18-31 is not listed on IDEAS
    19. repec:prg:jnlcfu:v:2018:y:2018:i:1:id:507:p:5-23 is not listed on IDEAS
    20. repec:eee:jaecon:v:64:y:2017:i:1:p:15-36 is not listed on IDEAS
    21. repec:eee:jiaata:v:18:y:2009:i:1:p:44-59 is not listed on IDEAS
    22. repec:eee:advacc:v:31:y:2015:i:1:p:1-10 is not listed on IDEAS
    23. Nelson, Karen K. & Price, Richard A. & Rountree, Brian R., 2008. "The market reaction to Arthur Andersen's role in the Enron scandal: Loss of reputation or confounding effects?," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 279-293, December.
    24. Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
    25. repec:eee:advacc:v:30:y:2014:i:1:p:55-66 is not listed on IDEAS

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