Audit Quality of Second-Tier Auditors: Are All Created Equally

Abstract

Policy makers and regulators are interested in increasing auditor choice. A common problem faced by large firms is that one auditor is for external audit, a second for internal audit, a third for tax, a fourth for consulting (Cox, 2005; GAO, 2008, p. 22). A possible option for alleviating this auditor choice problem is to have the second-tier auditors as an acceptable alternative to the Big 4. The second-tier auditors include BDO, Grant Thorton, Crowe, and McGladrey. According to a 2003 U.S. General Accounting Office (GAO, 2003) survey of large public firms, the major consideration in auditor choice is audit quality. We examine audit quality 2 The BRC Academy Journal of Business Vol. 4, No. 1 of each of the second-tier auditors to determine if auditor choice is being increased while maintaining audit quality. We use two common measures of audit quality, earnings response coefficient and abnormal accrual, during the 2000 to 2010 period. We find no significant statistical difference in audit quality among the second-tier auditor especially in the period after Sarbanes-Oxley Act. The results should be comforting to policy makers and regulators, who are interested in increasing auditor choice.