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Effects of the big 4 national and city-level industry expertise on audit quality in the United Kingdom
journal contributionposted on 27.04.2020, 10:12 by Ayuni Mohd-Kharuddin, Ilias G Basioudis, Omar Al Farooque
In this study, we examine for the first time in the UK, the effects of the Big 4 audit firms’ national (firm-level) and city-office (office-level) industry specialization on audit quality. Based on public firms listed on the London Stock Exchange (LSE), we find that clients of the Big 4 joint national and city-level auditor industry specialists have smaller magnitude of discretionary accruals, lower income-increasing discretionary accruals and lesser accrual estimation error, indicating higher audit quality. In addition, we also find that when the Big 4 auditors are both national and city-specific industry leaders, their clients are more likely to be issued a modified audit opinion as well as a going concern audit report. The findings imply that industry expertise of the national and city-based professionals of the Big 4 firms have now been captured and distributed more broadly throughout the firm and within their offices. In addition, the outcome of this study provides additional evidence that the more recent UK evidence of a fee premium exclusively attached to the Big 4 joint specialists reflects their differentiated service and higher quality audit relative to their non-specialist counterparts.
- Business and Economics