Big-4 auditors and audit quality: a novel firm life-cycle approach
ISSN: 2049-372X
Article publication date: 12 August 2022
Issue publication date: 13 October 2023
Abstract
Purpose
Firm-specific factors such as size, profitability, growth, risk and complexity, in addition to agency-related issues determine both auditor selection and firm life-cycle stage. This paper aims to examine whether and how the effect of Big-4 auditors (B4As) on client firms’ audit quality varies across firms’ life-cycle stages.
Design/methodology/approach
The sample comprises 1,813 firm-year observations in India’s emerging economy from 2011 to 2020. The Modified Jones model and Jones (signed, unsigned) model are used to compute discretionary accruals/audit quality. The authors use Koh et al.’s (2015) methodology to determine the firm life cycle.
Findings
The authors’ key findings show that the client firms employing B4As have superior audit quality than those employing non-Big-4 auditors (NB4As). The authors also show that the life-cycle stage significantly impacts the relationship between B4As and a firm’s audit quality. Furthermore, B4A client firms report superior audit quality vis-à-vis NB4A firms only in the birth- and decline-stages. The audit quality of growth- and mature-stage B4A and NB4A client firms is not significantly different.
Practical implications
Implications for managers include the decision to hire B4As. Given that B4As earn a significant fee premium, managers leading birth- and decline-stage firms should hire B4As, while managers of growth- and mature-stage firms should not.
Originality/value
To the best of the authors’ knowledge, this is the first paper to examine the moderating effect of the firm life-cycle stage on the selection of B4As and their impact on audit quality.
Keywords
Acknowledgements
The authors would like thank the Co-Editor-in-Chief, Prof. Warren Maroun and Prof. Charl de Villiers, and two anonymous reviewers for their valuable advice and comments. Any errors remain the sole responsibility of the authors.
Citation
Jain, S. and Agarwalla, S.K. (2023), "Big-4 auditors and audit quality: a novel firm life-cycle approach", Meditari Accountancy Research, Vol. 31 No. 5, pp. 1436-1452. https://doi.org/10.1108/MEDAR-06-2021-1344
Publisher
:Emerald Publishing Limited
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