Reporting Incentive Conflicts and Audit Effectiveness Differentiation between Big Six and Non-Big Six Auditors

Abstract

In this paper, we examine whether the effectiveness of external auditing for deterring opportunistic earnings management (i.e., audit effectiveness) differs between two distinct situations with income-increasing vs. income-decreasing incentives and how audit effectiveness differentiation between Big Six and non-Big Six auditors is differentially influenced by the direction of earnings management incentives. Our results show that only when managers have incentives for income-increasing accounting choices are Big Six auditors more effective than non-Big Six auditors in deterring/monitoring opportunistic earnings management. Contrary to conventional wisdom, we find no significant difference in audit effectiveness between Big Six and non-Big Six auditors when managers prefer conservative accounting choices. The above findings are robust to different proxies for opportunistic earnings management, different proxies for the direction of earnings management incentives, and different regression methods used.