The Role of Big 6 Auditors in the Credible Reporting of Accruals

TLDR

High‑accrual firms face greater opportunities for earnings manipulation and thus seek Big 6 auditors to enhance earnings credibility. The study examines whether firms with a higher propensity to generate accruals are more likely to employ a Big 6 auditor. Across NASDAQ firms 1975–1994, firms with a higher endogenous accrual propensity were more likely to use a Big 6 auditor, yet these firms reported lower discretionary accruals, indicating that Big 6 auditors constrain aggressive accrual reporting.

Abstract

This study investigates if the use of a Big 6 auditor is increasing in the firm's endogenous propensity to generate accruals. High-accrual firms have greater scope for aggressive and/or opportunistic earnings management and therefore have an incentive to hire a Big 6 auditor to provide assurance that reported earnings are credible. For a large sample of NASDAQ firms over the period 1975–1994 we find that the likelihood of using a Big 6 auditor is increasing in firms' endogenous propensity for accruals. Even though Big-6-audited firms have higher levels of total accruals, we also find they have lower amounts of estimated discretionary accruals. This finding is consistent with Big 6 auditors constraining aggressive and potentially opportunistic reporting of accruals.