An Analysis of Cross-Sectional Differences in Big and Non-Big Public Accounting Firms' Audit Programs
- 1 May 2006
- journal article
- Published by American Accounting Association in AUDITING: A Journal of Practice & Theory
- Vol. 25 (1), 27-48
- https://doi.org/10.2308/aud.2006.25.1.27
Abstract
A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.Keywords
This publication has 10 references indexed in Scilit:
- Audit Fees: A Meta‐analysis of the Effect of Supply and Demand Attributes*Contemporary Accounting Research, 2006
- Client characteristics, abnormal accruals and auditor switches: An empirical studyAsia-Pacific Journal of Accounting & Economics, 2003
- Brand Name Audit Pricing, Industry Specialization, and Leadership Premiums post‐Big 8 and Big 6 Mergers*Contemporary Accounting Research, 2002
- The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This ContributionJournal of Accounting Research, 2001
- The Role of Big 6 Auditors in the Credible Reporting of AccrualsAUDITING: A Journal of Practice & Theory, 1999
- Law and FinanceJournal of Political Economy, 1998
- The Effect of Audit Quality on Earnings Management*Contemporary Accounting Research, 1998
- Resource Allocation Decisions in Audit Engagements*Contemporary Accounting Research, 1997
- Auditor size and audit qualityJournal of Accounting and Economics, 1981
- The Pricing of Audit Services: Theory and EvidenceJournal of Accounting Research, 1980