Audit Firm and Audit Partner Style in Non-Big 4 Firms

Abstract

We examine Big 4 and non-Big 4 auditor styles and the effect of Big 4 style through individual audit partners on financial statement comparability. Our study has four principal findings: One, we find the existence of a unified Big 4 style, distinct from any individual Big 4 firm style, leading to increased comparability for pairs of clients with Big 4 auditors. Two, we find that this unified Big 4 style persists in audits conducted by non-Big 4 partners with former Big 4 experience. Three, we find that annually inspected non-Big 4 firms have their own firm-level styles but do not find evidence of individual triennially inspected non-Big 4 firm styles affecting financial statement comparability. Four, we find evidence that the unified Big 4 style effect on non-Big 4 clients with a former Big 4 partner is partially offset by the individual firm style of annually inspected non-Big 4 firms. In further cross-sectional tests, consistent with our expectations, we find that the unified Big 4 style effect through former Big 4 experienced auditors is stronger for partner level Big 4 experience and for pairs of partners that left the Big 4 firm around the same time. Our results provide novel evidence on the ways in which auditors foster financial statement comparability apart from the firm’s unique audit methodologies and accounting standard interpretations.