The revival of large consulting practices at the Big 4 and audit quality

Dain C. Donelson; Matthew Ege; Andrew J. Imdieke; Eldar Maksymov

doi:10.1016/j.aos.2020.101157

The revival of large consulting practices at the Big 4 and audit quality

Dain C. Donelson, Matthew Ege, Andrew J. Imdieke, Eldar Maksymov

Accountancy, School of

Research output: Contribution to journal › Article › peer-review

27 Scopus citations

Abstract

The Big 4 have acquired numerous consulting firms since the late 2000s, and regulators are concerned that a focus on consulting practices could negatively affect audit quality through audit firm culture. Audit firms counter by arguing that expertise gained through consulting can improve knowledge brought to audits. Using a difference-in-differences design, restatements as an audit quality proxy, and enterprise resource planning- (non-enterprise resource planning-) related acquisitions as a proxy for audit- (non-audit-) related acquisitions, we find nuanced support for both positions, depending on acquisition type. Audit quality increases (decreases) at the local office level after the acquisition of consulting firms that provide services that relate (do not relate) to the audit. Semi-structured interviews of 17 highly-experienced audit practitioners suggest that consulting firm acquisitions positively (negatively) affect audit quality through expertise transfer (shifting the culture towards commercialism) when acquisitions are (are not) audit-related. Thus, the effect of consulting firm acquisitions on audit quality appears to depend on how closely the acquired services are related to the audit.

Original language	English (US)
Article number	101157
Journal	Accounting, Organizations and Society
Volume	87
DOIs	https://doi.org/10.1016/j.aos.2020.101157
State	Published - Nov 2020

Keywords

Audit quality
Consulting
Non-audit services
PCAOB

ASJC Scopus subject areas

Accounting
Sociology and Political Science
Organizational Behavior and Human Resource Management
Information Systems and Management

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10.1016/j.aos.2020.101157

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title = "The revival of large consulting practices at the Big 4 and audit quality",

abstract = "The Big 4 have acquired numerous consulting firms since the late 2000s, and regulators are concerned that a focus on consulting practices could negatively affect audit quality through audit firm culture. Audit firms counter by arguing that expertise gained through consulting can improve knowledge brought to audits. Using a difference-in-differences design, restatements as an audit quality proxy, and enterprise resource planning- (non-enterprise resource planning-) related acquisitions as a proxy for audit- (non-audit-) related acquisitions, we find nuanced support for both positions, depending on acquisition type. Audit quality increases (decreases) at the local office level after the acquisition of consulting firms that provide services that relate (do not relate) to the audit. Semi-structured interviews of 17 highly-experienced audit practitioners suggest that consulting firm acquisitions positively (negatively) affect audit quality through expertise transfer (shifting the culture towards commercialism) when acquisitions are (are not) audit-related. Thus, the effect of consulting firm acquisitions on audit quality appears to depend on how closely the acquired services are related to the audit.",

keywords = "Audit quality, Consulting, Non-audit services, PCAOB",

author = "Donelson, {Dain C.} and Matthew Ege and Imdieke, {Andrew J.} and Eldar Maksymov",

note = "Funding Information: We thank Mark Peecher (editor), two anonymous referees, Andrew Acito, Chris Hogan, Young Hoon Kim, Andrew Kitto, Stephen Rowe, and Dechun Wang, workshop participants at the University of Florida and participants in the Introduction to Accounting Research seminar at the University of Florida for their helpful comments and suggestions. We appreciate the helpful research assistance of Nathan Kaplan and Sean McCarthy. Dain Donelson, Matthew Ege, Andrew Imdieke, and Eldar Maksymov acknowledge support from the University of Texas, Texas A&M University, the University of Notre Dame, and Arizona State University , respectively. Funding Information: We thank Mark Peecher (editor), two anonymous referees, Andrew Acito, Chris Hogan, Young Hoon Kim, Andrew Kitto, Stephen Rowe, and Dechun Wang, workshop participants at the University of Florida and participants in the Introduction to Accounting Research seminar at the University of Florida for their helpful comments and suggestions. We appreciate the helpful research assistance of Nathan Kaplan and Sean McCarthy. Dain Donelson, Matthew Ege, Andrew Imdieke, and Eldar Maksymov acknowledge support from the University of Texas, Texas A&M University, the University of Notre Dame, and Arizona State University, respectively. Publisher Copyright: {\textcopyright} 2020 Elsevier Ltd",

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AU - Ege, Matthew

AU - Imdieke, Andrew J.

AU - Maksymov, Eldar

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N2 - The Big 4 have acquired numerous consulting firms since the late 2000s, and regulators are concerned that a focus on consulting practices could negatively affect audit quality through audit firm culture. Audit firms counter by arguing that expertise gained through consulting can improve knowledge brought to audits. Using a difference-in-differences design, restatements as an audit quality proxy, and enterprise resource planning- (non-enterprise resource planning-) related acquisitions as a proxy for audit- (non-audit-) related acquisitions, we find nuanced support for both positions, depending on acquisition type. Audit quality increases (decreases) at the local office level after the acquisition of consulting firms that provide services that relate (do not relate) to the audit. Semi-structured interviews of 17 highly-experienced audit practitioners suggest that consulting firm acquisitions positively (negatively) affect audit quality through expertise transfer (shifting the culture towards commercialism) when acquisitions are (are not) audit-related. Thus, the effect of consulting firm acquisitions on audit quality appears to depend on how closely the acquired services are related to the audit.

AB - The Big 4 have acquired numerous consulting firms since the late 2000s, and regulators are concerned that a focus on consulting practices could negatively affect audit quality through audit firm culture. Audit firms counter by arguing that expertise gained through consulting can improve knowledge brought to audits. Using a difference-in-differences design, restatements as an audit quality proxy, and enterprise resource planning- (non-enterprise resource planning-) related acquisitions as a proxy for audit- (non-audit-) related acquisitions, we find nuanced support for both positions, depending on acquisition type. Audit quality increases (decreases) at the local office level after the acquisition of consulting firms that provide services that relate (do not relate) to the audit. Semi-structured interviews of 17 highly-experienced audit practitioners suggest that consulting firm acquisitions positively (negatively) affect audit quality through expertise transfer (shifting the culture towards commercialism) when acquisitions are (are not) audit-related. Thus, the effect of consulting firm acquisitions on audit quality appears to depend on how closely the acquired services are related to the audit.

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M1 - 101157

ER -

The revival of large consulting practices at the Big 4 and audit quality

Abstract

Keywords

ASJC Scopus subject areas

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