Audit Office Size, Audit Quality and Audit Pricing : Evidence from Small and Medium Sized Entities

Prior studies have explored whether there are differences in audit quality between Big 4 and non Big 4 audit firms in the private client segment. This study extends the research by investigating if, and possibly how, audit quality and audit pricing varies between a broader range of audit firms as well as with audit office size. We study quality and pricing in the private audit market and use disciplinary sanctions as the measure of audit quality. Three kinds of disciplinary sanctions are examined: reprimands, warnings and exclusions from the profession. We find no significant differences in the likelihood of sanctions between Big 4 audit firms and GrantThornton and BDO, which are the fifth and sixth largest audit firms in Sweden. However, we find that the probabilities of warnings or exclusions from the profession are much higher for non Big 6 auditors than for Big 4 auditors. Among non Big 6 auditors, there is a strong negative association between the likelihood of sanctions and audit office size. Audit fees generally follow a similar pattern, which suggests that larger audit firms put in more effort or have a greater expertise. These results suggest that audit quality is differentiated in the private segment market. However, the main dimensions are Big 6 versus non Big 6 as well as the office size of non Big 6 audit firms