David versus Goliath

The Relation between Auditor Size and Audit Quality for U.K. Private Firms

Bibliographic Data

ID19447663
AuthorsJeff Zeyun Chen (0000-0001-6001-0604, Texas Christian University), Anastasios Elemes (0000-0002-3500-4904, École Supérieure des Sciences Économiques et Commerciales), Gerald J Lobo (0000-0002-4644-5633, University of Houston, corresponding author)
Year2023
Volume32
Issue2
Pages447-480
Publication date2023-03-15
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueEuropean Accounting Review (JOURNAL)
Journal identifiersISSN: 0963-8180 • E-ISSN: 1468-4497
PublisherInforma UK Limited (PUBLISHER • GB)
DOI10.1080/09638180.2021.1986090
OpenAlexW3210179239
LanguageEN
Citations received1
References cited80

We examine the relation between auditor size and audit quality for a sample of U.K. private firms. Private firms prioritize tax considerations over reducing information asymmetry in their financial reporting. We find that Big 4’s private clients exhibit higher levels of discretionary accruals and lower precision of accrual estimates than non-Big 4’s private clients. Although Big 4 auditors are less tolerant of income-increasing earnings management, they leave more room for downward earnings management and their private clients are able to engage in greater tax avoidance. These results are stronger for standalone firms than for business groups as the latter’s greater demand for stakeholder communication motivates Big 4 auditors to increase audit quality. Collectively, our evidence suggests that Big 4 auditors adjust audit quality in a more competitive segment of the audit market where client firms generally perceive the benefit from tax minimization to outweigh the cost of reduced earnings informativeness

Accrual · Audit · Business · Earnings · Earnings Management · Earnings quality · Quality audit · Auditing, Earnings Management, Governance · Corporate Taxation and Avoidance · Taxation and Compliance Studies · Accounting

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Open DOIOpen Access