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Big 4 Conservatism Around the World

In: Corporate Governance in Emerging Markets

Author

Listed:
  • Richard Chung

    (Griffith University)

  • Michael Firth

    (Lingnan University)

  • Jeong-Bon Kim

    (City University of Hong Kong)

  • Lei Pang

    (Hong Kong Baptist University)

Abstract

Conservatism is a long-established underlying principle of accounting but its implementation has come under the spotlight in recent years following the spate of well-publicized corporate collapses in the U.S. and elsewhere. Previous studies have shown that the Big 4 audit firms are more conservative than the non-Big 4 in the U.S. The current study examines whether the U.S. findings extend to other countries. In doing so, we make use of a relatively new measure of conservatism, namely, the C-score developed by Khan and Watts. We find that the conclusion drawn from U.S. studies, namely that the Big 4 are more conservative, extends to the international setting but only under certain conditions. Specifically, the Big 4 are more conservative in those countries where litigation and reputation risks, broadly defined, are high. This increase in conservatism represents a rational response by the Big 4 auditors to their greater exposure, vis-a-vis the non-Big 4 auditors, to litigation and reputation loss in those countries.

Suggested Citation

  • Richard Chung & Michael Firth & Jeong-Bon Kim & Lei Pang, 2014. "Big 4 Conservatism Around the World," CSR, Sustainability, Ethics & Governance, in: Sabri Boubaker & Duc Khuong Nguyen (ed.), Corporate Governance in Emerging Markets, edition 127, pages 197-238, Springer.
    • Handle: RePEc:spr:csrchp:978-3-642-44955-0_8
    DOI: 10.1007/978-3-642-44955-0_8
    as

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