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The Effect of Big Four Office Size on Audit Quality
Jere R Francis, University of Missouri - Columbia
Michael D Yu, Washington State University
ABSTRACT. Larger offices of Big 4 firms are argued to provide higher quality audits than smaller offices due to greater in-house experience and more expertise in administering the audits of publicly listed clients. This conjecture is tested for a sample of 6,568 firm-year observations from 2003 to 2005 audited by 285 unique offices of the Big 4 firms in the United States. The results are consistent with larger offices providing higher quality audits. Specifically, clients in larger offices evidence less earnings management (smaller abnormal accruals and less earnings benchmark beating behavior). Big 4 auditors in larger offices are also more likely to issue going concern audit reports, ceteris paribus. While accounting firms have strong incentives to provide uniform quality across all practice offices in the post-SOX era, these findings suggest there are frictions in the ability of firms to accomplish this through existing knowledge sharing practices and quality control procedures.
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