Do Big 4 Auditors Consistently Provide Better Audit Quality? Evidence from Government Audits

Abstract

Audit quality is affected by both the demand and supply of audits. A major challenge in audit quality research is to isolate the audit supply effect. The audits of governmental provincial entities in Canada offer an appealing setting where the demand for audit quality is relatively uniform. This is because the entities that are audited by different types of auditors, namely Big 4 firms, non-Big 4 firms, and provincial auditors general are eventually consolidated into the Public Accounts, one set of provincial financial statements. Therefore, one client, the Province, is largely responsible for the demand for audit quality. Using various measures of audit quality, we find that Big 4 auditors underperform government auditors on all of our measures of audit quality, and underperform the non-Big 4 firms on most of the measures. We also find that the lower audit quality of Big 4 firms is concentrated in the offices with less government experience. Overall, our evidence suggests that Big 4 auditors do not provide better audit quality in the setting of government audits, but rather they are associated with lower audit quality. Our study contributes to the ongoing debate on whether Big 4 auditors provide better audit quality.