Do Big 4 Firms Provide Higher Audit Quality in Government Audits? Evidence from Canadian Provincial Consolidated Financial Statements

Abstract

SUMMARY Audit quality is influenced by both the demand for and the supply of audits. A major challenge in audit quality research involves isolating supply effects. The audits of Canadian provincial governmental entities present an appealing setting, where there is low variation in the demand for audit quality. Our analysis, employing various audit quality metrics, reveals that Big 4 firms underperform both government auditors and non-Big 4 firms in our setting. We find robust evidence that less government audit knowledge is a key channel through which Big 4 auditors underperform. Additionally, the weaker performance of Big 4 firms may be due to lower effort. Insights from interviews with government audit executives and audit committee members provide evidence supporting the quantitative results. Our results are robust to propensity score matching and to tests that address alternative explanations. Our findings have important implications for governments, audit committees, and auditors in the government sector. JEL Codes: M41; M42.