Organizational Complexity and Auditor Quality

Abstract

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This study investigates two questions: (1) What is the relationship between organizational complexity and auditor choice, and (2) Does auditor choice influence the relationship between organizational complexity and firm value?Research Findings/Insights: Examination of a sample of large public US companies reveals a positive association between auditor quality and various proxies for organizational complexity. We also find a positive association between organizational complexity and firm value when the complex firm hires Big N auditors. The results are robust to alternative measures of auditor quality and firm value and to controls for the regulatory environment.Theoretical/Academic Implications: The results extend the agency theory argument that agency costs resulting from information asymmetry between managers and investors affect the demand for external monitoring by auditors, specifically the demand by organizationally complex firms for higher quality audits. We also shed light on how the value enhancement of a complex organization depends on auditor quality.Practitioner/Policy Implications: Our findings offer new perspectives for managers of complex firms that are industrially or geographically diversified. They can use the retention of a larger auditor as a credible signal that their consolidated reports are more informative about their financial performance. Further, the findings provide new insight into the value that investors place on auditor quality when they assess the value of firms with complex organizational structures.