The Audit Quality Effects of Small Audit Firm Mergers in the United States

50 Pages Posted: 26 Jul 2015 Last revised: 5 Aug 2020

See all articles by Brant E. Christensen

Brant E. Christensen

University of Oklahoma; Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law

Kecia Smith

North Carolina A&T State University

Dechun Wang

Texas A&M University

Devin Williams

University of Illinois

Date Written: August 4, 2020

Abstract

Increased audit regulation, coupled with practitioner reports of “hyper-acquisitive” behavior among smaller firms, creates a dynamic environment in which to assess changes in the U.S. audit market. Against this backdrop, we examine the consequences of small audit firm mergers on audit quality, a topic about which little is known. We find that audit quality declines after small audit firm merger events. Specifically, we find that PCAOB-identified audit deficiencies and the absolute value of discretionary accruals increase and audit fees decrease. Further, it appears that this decline in audit quality occurs primarily among the new clients obtained through the merger, as well as when the acquiring firm is growing rapidly, suggesting a focus on growth over quality. Taken together, our results provide evidence regarding the negative consequences of small audit firm mergers in the United States.

Keywords: Mergers, public company audit market, audit quality, audit regulation

JEL Classification: M42

Suggested Citation

Christensen, Brant E. and Smith, Kecia and Wang, Dechun and Williams, Devin, The Audit Quality Effects of Small Audit Firm Mergers in the United States (August 4, 2020). Mays Business School Research Paper No. 2635605, Available at SSRN: https://ssrn.com/abstract=2635605 or http://dx.doi.org/10.2139/ssrn.2635605

Brant E. Christensen

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law ( email )

Helleveien 30
N-5045 Bergen
Norway

Kecia Smith (Contact Author)

North Carolina A&T State University ( email )

1601 E. Market St.
Greensboro, NC 27411
United States
336-285-3389 (Phone)

HOME PAGE: http://www.ncat.edu/employee-bio.php?directoryID=1921383412

Dechun Wang

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

Devin Williams

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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