Financial Characteristics of Companies Audited by Large Audit Firms

Purpose “ The purpose of this paper is to examine how financial characteristics associated with the choice of a big audit firm with further investigation on the agency costs of free cash flows.Design/methodology/approach “ The sample used for this work includes industrial listed companies from Germany and France. To test our hypothesis, we used a number of logit models, extending the standard model selection audit firm, to include the variables of interest. Following previous work, our dependent dummy variable is Big4 or non-Big4.Findings “ We observed that most independent variables in the German companies show similar results to previous work, but we did not have the same results for the French industry. Moreover, our findings suggest that the total debt and dividends can be an important reason for determining the choice of a large audit firm, reducing agency costs of free cash flows.Research limitations/implications “ This study has some limitations on the measurements of the cost of the audit fees and also generates opportunities for additional searching.Originality/value “ The paper provides only one aspect to explain the relationship between the problems of agency costs of free cash flow and influence in choosing a large auditing firm, which stems from investors\u27 demand for higher quality audits

Auditor conservatism following audit failures

Purpose – The purpose of this paper is to examine the effects of audit failure on Big 4 audit firm monitoring activities. The paper analyzes changes in discretionary accruals (DAs) among clients of firms implicated in audit failure events and examines whether these DAs decline in the period following the event. Design/methodology/approach – The paper uses archival data and regression analyses to test whether DAs for clients of implicated audit firms decline in the period following the audit failure as compared to clients of other Big 4 firms. Audit failures are identified during the years 1996-2004 based on significant lawsuit settlements. The paper focuses on an office-level analysis to control for audit quality differences which may vary across firm geographic locations as suggested by recent research. Findings – Empirical results indicate that auditor response to audit failure has changed over time. Auditors implicated in audit failure events occurring in the post-Enron and Sarbanes-Oxley period enforce more conservative accounting choices in the year following the event. Specifically, clients of the implicated firm's office report a significant decline in discretionary accounting accruals relative to clients of other auditors in the same city location. However, a significant change in client discretionary accounting accruals is not found following audit failures that occurred prior to 2001, the year of the Enron bankruptcy. Originality/value – The results of this paper extend the knowledge of the effects of litigation pressure on audit quality. Additionally, this paper helps address the question of how large-scale audit failures witnessed at the beginning of the century have impacted audit firm conservatism.Auditing, Auditors, Financial reporting, Litigation, United States of America