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Does the Flight of Clients from the Big 4 to Tier 2 Auditors Indicate Lower Audit Quality?
Gopal V Krishnan, George Mason University
Myung Seok Park, Virginia Commonwealth University
Jayaraman Vijayakumar, Virginia Commonwealth University
ABSTRACT. Policy makers have expressed concern about further concentration in the audit market following the demise of Arthur Andersen and have called for removing restrictions impending competition with the Big 4 auditors by national and local audit firms. Lately, several clients of the Big 4 have switched to second tier auditors. Does this switch represent lower audit quality? We examine the abnormal accruals of clients that change from Big 4 to second tier auditors and find that relative to two peer groups consisting of clients that did not change auditors and clients that changed within Big 4 auditors, abnormal accruals are significantly negative in the year of change and continue to be negative even in the year after the change. These results have implications for audit quality and auditor conservatism and suggest that the second tier auditors constrain the tendency of managers to report income-increasing abnormal accruals more than the Big 4 auditors.
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