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How Big-4 Firms Improve Audit Quality

Author

Listed:
  • 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)

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.

Suggested Citation

  • Limei Che & Ole-Kristian Hope & John Christian Langli, 2020. "How Big-4 Firms Improve Audit Quality," Management Science, INFORMS, vol. 66(10), pages 4552-4572, October.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:10:p:4552-4572
    DOI: 10.1287/mnsc.2019.3370
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    References listed on IDEAS

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