The Spillover Effect of Audit Firm Office Acquisition on the Audit Quality of the Existing Client Base

This study investigates accounting firm office mergers and acquisitions (M&A). It explores whether office M&A affect post-acquisition office audit quality, particularly whether there is a spillover effect on the existing client base of the acquiring office. We capitalize on a unique circumstance: the 2002 acquisition of Arthur Andersen (Andersen) office practices by other audit firm offices. This setting involves a set of offices in each of the remaining large international audit firms that acquired entire Andersen local practices (treatment group) and a set of offices that did not acquire Andersen practices (control group). Using a within-audit firm matched sample and difference-in-difference research design, we find robust evidence of higher audit quality post-acquisition among the audits of existing clients of the acquiring offices. These findings extend the literature on office audit quality and provide initial evidence of the impact of audit firm office M&A on the existing client base. The findings also suggest that practitioner and scholarly literature on audit practice mergers should consider the impact of audit firm M&A on the existing client base as well as the acquired clients