Audit firm alliances and audit quality : international evidence

Abstract

Audit quality is influenced by both auditor's competencies and auditor's incentives. In my dissertation, I use international auditing data to investigate the effect of joining audit firm alliances on audit pricing and audit quality, and whether country-level differences and alliance-level differences play mediating roles in the average effect. My dissertation corresponds to the recent call from regulators and practitioners on audit market competition. Using manually-collected data of non-Big Four audit firms joining audit firm alliances and their joint dates in 17 countries, I find that after non-Big Four audit firms join audit firm alliances, there is an increase in clients' audit fees and a decrease in clients' discretionary accruals, indicating that both audit pricing and audit quality increase after non-Big Four audit firms join alliances. I also find that the effect of joining audit firm alliances on increasing audit quality and audit pricing is stronger if clients are from countries or industries with lower litigation risks. Moreover, I find that country-level audit quality and firm-level audit quality interact with each other closely. Specifically, the documented effect on audit quality and audit pricing is stronger in countries with low country-level audit quality. Further, I find that the increases in audit fees and audit quality are more pronounced if audit firms join audit firm alliances with high number of staff in each office, or alliances with high member growth, or alliances with high fee income. Moreover, I find that the increases in audit fees and audit quality are significant in both audit firm networks' clients and audit firm associations' clients, but the effect is more pronounced among clients' of audit firm networks. Overall, my findings suggest that joining audit firm alliance is an effective way for non-Big Four audit firms to earn audit fee premiums and increase audit quality.