Auditor performance variation: Impact of audit firm size and industry regulation

Robyn Moroney* [Monash University] Carlin Dowling** [The University of Melbourne]

August 2005

ABSTRACT: Extensive empirical evidence supports the hypothesis that Big 4 audit firms provide higher quality audits than Non-Big 4 audit firms (Francis, 2004). Higher audit quality is the joint outcome of the audit tasks completed by the audit team and negotiation(s) between the audit firm and client. Because minimum standards govern auditor competency, performance on audit tasks is assumed constant across audit firm tiers (DeAngelo, 1981). However, differences in audit firm structure and industry characteristics suggest the potential for task performance to vary across audit firm tiers. Auditors employed in Big 4 audit firms structured along industry specialist lines spend most, if not all, of their time working on clients within the one industry (Solomon et al., 1999; Taylor, 2000; Owhoso et al., 2002). This is not the case for auditors employed in Non-Big 4 audit firms. The purpose of this study is to investigate when audit firm size and degree of industry regulation lead to higher task performance. We conduct an experiment and consistent with our hypotheses we find that the performance level of industry specialist auditors employed in Big 4 audit firms is significantly higher than for auditors with relevant industry-based experience employed in Non-Big 4 audit firms when performing a task set in a highly regulated industry (superannuation). We also find that as expected audit firm size is not associated with a significant difference in performance level when auditors complete a task set in an unregulated industry (manufacturing). Our results contribute to the literature by providing evidence that the task performance benefits of using a Big 4 industry specialist auditor differ across regulated and unregulated industries. This has implications for clients considering whether to use a Big 4 or Non-Big 4 audit firm, and for audit firms in terms of how their staff are trained and deployed.

* Corresponding Author. Department of Accounting and Finance, Monash University, Box 197 Caulfield East, Vic. 3145 Australia. Robyn.Moroney@BusEco.monash.edu.au ** Department of Accounting and Business Information Systems, The University of Melbourne, Victoria, 3010, Australia. carlin@unimelb.edu.au