Do Big Four Auditors Always Provide Higher Audit Quality? Evidence from Pakistan

Abstract

The purpose of this paper is to examine the role of external auditors in potentially approving or limiting a firm's earnings management practices in institutional settings which do not provide incentives for auditors to deliver high audit quality. We use signed discretionary and performance-adjusted discretionary accruals as proxies for earnings management, and audit firm size (Big 4 vs. Non-Big 4) and audit opinion type (Qualified vs. Unqualified) as measures for audit quality. Using a sample of 183 firms listed on the Karachi Stock Exchange, Pakistan for the five-year period from 2009 to 2013, we find that there is statistically no significant difference between earnings management activities of firms audited by Big 4 and non-Big 4 auditors. Audit opinion is not being issued in response to the earnings management activities being employed by firms. Further consistent with the entrenchment hypothesis, we find that earnings management is pervasive in family controlled firms and Big 4 auditors do not moderate the relation between family firm dominance and earnings management. A small audit market coupled with non-existent litigation risk, strong economic bonding of auditors with their clients, lower investor protection, poor enforcement mechanisms and dominance of firms by influential family groups lead auditors to behave opportunistically, which undermines their independence and objectivity.

Do Earnings Management Leads to Sub-optimal Investments by Firms? Empirical Evidence From the Textile Sector of Pakistan

“…As per our knowledge, there is scare research in the area and with the moderating effect of audit quality, the topic has not been researched much by the researchers. This research will be different from earlier research in this topic (Biddle et al, 2009, Cutillas Gomariz and Sánchez Ballesta, 2014, Houcine, 2013, in the sense that we are looking at the moderating effect of audit quality in relation to EM and investment efficiency. In our study, we used the unique dataset from the Textile sector of Pakistan.…”

“…The problem of EM exists in the country and managers are only earning for their benefits (Ilmas et al, 2018). The role of auditors is becoming essential and audit quality has its impact on the managerial decision making (Abid et al, 2018). This study is providing insight into how investment is affected by EM and how this impact is moderated by the quality of auditors.…”

“…The quality of information impacts the investment efficiency of the firm and if there is a huge gap between information level of firm managers and shareholders than it can impact negatively on the investment efficiency of the firm (Bushman and Smith, 2001). The reduction in EM activities reduce the chances for the firm to indulge in sub -optimal investments and the problem of moral hazard and adverse selection can be reduced (Biddle et al, 2009, Chen et al, 2011, McNichols and Stubben, 2008. The quality of auditors has a significant impact on the financial statements quality of the firms and due to recent financial frauds in the corporate world, the auditors' role is under scrutiny (Romanus et al, 2008).…”

Audit Partner Tenure, Audit Quality and Audit Fees: Evidence from Jordanian Firms

“…"Renewing the covenant with investors". Speech before the New York University Center for Law and Busi -Audit Quality (AQ): expressed by the Big Four audit firms (BIG4) (Abid, et al, 2018), it is the name of the world's top four accounting and professional services firms, who audit most public shareholding companies, as well as many private companies (https://www.google.com). There also a confidence that Big audit firms supply higher goodness audits than non-Big audit firms because Big audit firms have larger client rules and, thus, have more to lose in the case of loss of reputation that would be correlated with a bad performed audit (Jordan, et al, 2010).…”

Audit Quality and Several of Its Determinants

“…Khasharmeh and Desoky, 2018); the audit firm category, respectively Big 4 or non-Big 4(Abid et al, 2018); the manner of auditors" rotation and switch to another category of audit firm(Febrianto et al, 2017); the manner of auditors" rotation (voluntary or mandatory), the membership of the audit firm to Big 4 and the auditor tenure(Choi et al, 2017). Other factors were also identified, such as: time to complete the engagement, the auditors" gender, position within the firm and experience, number of clients, size of the local office and audit firm(Broberg et al, 2017); the category of firms in the case of joint audit(Lobo et al, 2017); the audit team members" response to stress (Yan and Xie, 2016); the level of knowledge of the auditing standards and the degree of auditors' loading(Brown et al, 2016); the quality control of the audit supervision(Löhlein, 2016); the disciplinary sanctions imposed by the professional organizations (De Fuentes et al, 2015); the auditor tenure (Gonzalez-Diaz et al, 2015); the change of the organization form of the audit firm(Wang and Dou, 2015); the client firm's governance(Beisland et al, 2015); the membership in an association of small audit firms(Bills and Cunningham, 2015); the auditor tenure and fees for non-audit services(Bell et al, 2015) and the previous audit failure (Francis and Michas, 2013).…”