The Effect of Big 4 Audit Firms on the Association between Accruals Quality and Split Bond Ratings

Abstract

This study examines the effect of Big 4 auditor choice on the relation between accruals quality and disagreement among credit rating agencies, namely split bond ratings. If credit rating agencies value the information provided by Big 4 auditors due to higher competence and independence, their rating decisions may greatly reflect the information in the financial statements audited by Big 4 auditors. As for non-Big 4, if credit rating agencies presume non-Big 4 auditors to provide relatively lower quality audit, then the potential costs of failing to predict default risk are perceived to be increase when they rely their rating decisions primarily on financial statements audited by non-Big 4 auditors. Given that credit rating agencies use both quantitative and qualitative information when formulating the rating of a firm’s financial condition, information other than audited financial information will be greatly incorporated in the decisions of credit rating agencies when the firm is audited by a non-Big 4 auditor. Under this viewpoint, credit rating agencies will rely on the accounting information of financial statements when they are audited by Big 4 auditors. Consistent with this argument, we find that the impact of accruals quality on split bond ratings is only prevalent when firms are audited by Big 4 auditors for the period 2011-2018. This suggests that there is a perceived difference in the information quality between Big 4 and non-Big 4 auditors from the credit rating agencies’ perspectives.