THESIS
2019
ix leaves, 94 pages : illustrations ; 30 cm
Abstract
Essay I: Audit Market Competition and Audit Quality: Evidence from the Entry of Big 4
into City-level Audit Markets in the U.S.
Given that the Big 4 audit firms continue to expand into new geographical areas in the U.S.,
our study examines how the entry of a Big 4 audit firm affects the audit quality of existing audit
firms. The results suggest that the entry of a Big 4 firm encourages incumbent audit offices in the
relevant market (i.e., within 200 km of the new Big 4 entrant) to enhance their audit quality, as
their clients report lower discretionary accruals and fewer incidences of accounting restatements
and are more likely to receive going-concern opinions. These results are robust to an instrumental
variable approach for dealing with endogeneity in entry decisions. We expl...[
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Essay I: Audit Market Competition and Audit Quality: Evidence from the Entry of Big 4
into City-level Audit Markets in the U.S.
Given that the Big 4 audit firms continue to expand into new geographical areas in the U.S.,
our study examines how the entry of a Big 4 audit firm affects the audit quality of existing audit
firms. The results suggest that the entry of a Big 4 firm encourages incumbent audit offices in the
relevant market (i.e., within 200 km of the new Big 4 entrant) to enhance their audit quality, as
their clients report lower discretionary accruals and fewer incidences of accounting restatements
and are more likely to receive going-concern opinions. These results are robust to an instrumental
variable approach for dealing with endogeneity in entry decisions. We explore the channel through
which intensified competition affects incumbents’ audit quality and find that incumbent audit firms
invest more in developing industry-specific knowledge to differentiate their service quality from
their competitors after the entry of a new Big 4 firm. Furthermore, we find that the enhanced audit
quality is mainly attributable to existing audit offices owned by other Big 4 firms rather than those
owned by non-Big 4 firms. Moreover, changes in audit quality are more pronounced for existing
audit offices with fewer Big 4 incumbents in their relevant markets (i.e., within 200 km of existing
audit offices) and when the incoming Big 4 firm has prior experience in a city’s most important industry. Finally, following the entry of a new Big 4 firm, audit fees paid to incumbent Big 4 audit
offices and to non-Big 4 audit offices, do not change significantly. Overall, our findings suggest
that the entry of a new rival compels incumbent large audit firms to improve their audit quality
without an increase in audit fees.
Essay II: Labor Market Settlement and Audit Quality
This study investigates whether concerns about post-retirement job opportunities incentivize
individual auditors approaching retirement to provide high quality audits. We find that being an
industry specialist or having better capital market credibility, measured by client ERC before
retirement, helps auditors become board members of listed firms after retirement. Conversely,
being sanctioned by the government or experiencing client restatements significantly reduces the
chances of auditors obtaining corporate board memberships after leaving the audit profession. In
addition, good audit quality increases the number of board memberships and the total pay obtained
by auditors after retirement. We also show that audit quality immediately before retirement has
more effect on post-retirement opportunities than auditors’ earlier audit quality. These findings
suggest that labor market benefits give end-of-career individual auditors incentives to provide high
quality audits.
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