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Why Big 4 Firms are not Employed: An Empirical Analysis of Auditor Switches from Big 4 to Local Firms in China
Charles J.P. Chen, City University of Hong Kong
Xijia Su, City University of Hong Kong
Xi Wu, Central University of Finance & Economics
ABSTRACT. In this study we take advantage of an organizational change in which a Chinese local CPA firm was merged into a Big 4 firm to examine whether it helps to retain valuable clients. At the time of merger the local firm had 46 listed clients, of which 11, 6, and 13 switched to other firms in three years following the merger. Empirical analysis ruled out the possibility of cost saving or opinion shopping considerations. We found that clients dismissed in the first year can be explained by risk avoidance considerations. However, clients switched in the third year after the merger are mostly profitable companies with healthy financial positions. Based on risk avoidance considerations these clients should not be dismissed. We conducted semi-structured focused interviews, and find that practices of Big 4 firms did not match expectations from local clients.
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