Big N Auditors and Audit Quality : New Evidence from Quasi-Experiments

Whether Big N auditors provide higher quality audits than non-Big N auditors remains a debate. Big N acquisitions of non-Big N auditors provide a unique setting of exogenous shocks to the acquired non-Big N auditors' client firms because they have to change auditors. We identify a sample of 331 treatment firms that switched to Big N auditors due to such Big N acquisitions. Using a difference-in-differences research design, we find that after these treatment firms switch to Big N auditors, they have improved audit quality as measured through signed and absolute discretionary accruals, and financial statement divergence scores. In contrast, we find that mergers or acquisitions among non-Big N auditors have little impact on the audit quality of their affected client firms. Further cross-sectional analyses suggest the improvement in audit quality is likely due to Big N auditors' general competence rather than their industry-specific expertise. Finally, we find no significant stock market reactions in the treatment firms around the announcements of Big N acquisitions, indicating that the capital markets may not attach any premium to improved audit quality associated with hiring a Big N auditor