Abstract
We examine changes over time in Big N auditors’ client selection and retention strategies, from 1970 to 2015, by client size and risk segments. We particularly focus on the period from 1997 to 2001, characterized by numerous tumultuous events that led to the Sarbanes–Oxley Act of 2002 (SOX). We find that Big N auditors shed en masse the smallest and riskiest clients during this tumultuous phase. Our results show that the initial impetus for the change in Big N’s client selection strategies at the dawn of the twenty-first century came from changes in the market conditions, not the demise of Arthur Andersen and the implementation of SOX, as concluded in prior literature. Those changes led to the current divide between the characteristics of Big N and non-Big N client segments that is taken for granted today. Our findings also shed light on the debate about the Big N association with audit quality. While we find existence of a Big N effect, we also find that this effect is highly correlated with, and appears and disappears with, changes in Big N’s client screening criteria.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 715-754 |
| Number of pages | 40 |
| Journal | Review of Quantitative Finance and Accounting |
| Volume | 56 |
| Issue number | 2 |
| DOIs | |
| State | Published - Feb 2021 |
Funding
We thank Ashiq Ali, Bruce Behn, Bugra Ozel, Aaron Crabtree, Keith Czerney, Paul Danos, David Emanuel, Joseph Gerakos, Nathan Goldman, Michael Gurbutt, Sean McCarthy (discussant), Ningzhong Li, Miguel Minutti-Meza, Gary Monroe, Tom Omer, Richard Sansing, Suraj Srinivasan, Nir Yehuda, Chris Yust, Dechun Wang, Chris Wolfe, Jieying Zhang, Yuan Zhang, and workshop participants at Texas A&M University, University of Nebraska (Lincoln), University of Texas (Dallas), the 2015 annual meeting of the American Accounting Association, and the 2016 meeting of the Canadian Academic Accounting Association for helpful comments. Daniel Aobdia gratefully acknowledges financial support from the Northwestern University Kellogg School of Management. He was a Senior Economic Research Fellow in the Center of Economic Analysis at the Public Company Accounting Oversight Board (PCAOB) between September 2014 and September 2016. He co-wrote this paper outside of his affiliation with the PCAOB. The views expressed in this paper are the views of the authors and do not necessarily reflect the views of the Board, individual Board members, or staff of the PCAOB. Anup Srivastava gratefully acknowledges financial support from the Canada Research Chairs program. We thank Ashiq Ali, Bruce Behn, Bugra Ozel, Aaron Crabtree, Keith Czerney, Paul Danos, David Emanuel, Joseph Gerakos, Nathan Goldman, Michael Gurbutt, Sean McCarthy (discussant), Ningzhong Li, Miguel Minutti-Meza, Gary Monroe, Tom Omer, Richard Sansing, Suraj Srinivasan, Nir Yehuda, Chris Yust, Dechun Wang, Chris Wolfe, Jieying Zhang, Yuan Zhang, and workshop participants at Texas A&M University, University of Nebraska (Lincoln), University of Texas (Dallas), the 2015 annual meeting of the American Accounting Association, and the 2016 meeting of the Canadian Academic Accounting Association for helpful comments. Daniel Aobdia gratefully acknowledges financial support from the Northwestern University Kellogg School of Management. He was a Senior Economic Research Fellow in the Center of Economic Analysis at the Public Company Accounting Oversight Board (PCAOB) between September 2014 and September 2016. He co-wrote this paper outside of his affiliation with the PCAOB. The views expressed in this paper are the views of the authors and do not necessarily reflect the views of the Board, individual Board members, or staff of the PCAOB. Anup Srivastava gratefully acknowledges financial support from the Canada Research Chairs program.
Keywords
- Audit quality
- Audit risks
- Big N audit firms
- Competitive structure
- Dot-com boom and bust
- Oligopoly
- Public companies
ASJC Scopus subject areas
- Accounting
- General Business, Management and Accounting
- Finance