Can Big 4 versus Non-Big 4 Differences in Audit-Quality Proxies Be Attributed to Client Characteristics?

TLDR

The study investigates whether differences in audit‑quality proxies between Big 4 and non‑Big 4 audit firms can be attributed to their clients’ characteristics. Using discretionary accruals, ex ante cost‑of‑equity capital, and analyst forecast accuracy as proxies, the authors apply propensity‑score and attribute‑based matching models to control for client characteristics while estimating audit‑quality effects. The matching models reveal no significant difference in audit‑quality proxies between Big 4 and non‑Big 4 auditors, suggesting that observed disparities are largely driven by client characteristics—particularly client size—though the study does not conclusively resolve the issue and encourages further research.

Abstract

ABSTRACT: This study examines whether differences in proxies for audit quality between Big 4 and non-Big 4 audit firms could be a reflection of their respective clients’ characteristics. In our analyses, we use three audit-quality proxies—discretionary accruals, the ex ante cost-of-equity capital, and analyst forecast accuracy—and employ propensity-score and attribute-based matching models in attempt to control for differences in client characteristics between the two auditor groups while estimating the audit-quality effects. Using these matching models, we find that the effects of Big 4 auditors are insignificantly different from those of non-Big 4 auditors with respect to the three audit-quality proxies. Our results suggest that differences in these proxies between Big 4 and non-Big 4 auditors largely reflect client characteristics and, more specifically, client size. We caution the reader that this study has not resolved the question, although we hope that it encourages other researchers to explore alternative methodologies that separate client characteristics from audit-quality effects.