Keywords

mergers, public company audit market, audit quality, audit regulation

Abstract

Increased audit regulation, coupled with reports of frequent mergers among smaller audit firms, creates a dynamic environment in which to assess changes in the U.S. audit market. We examine the audit quality consequences of audit firm mergers between small audit firms that audit public clients, a topic about which little is known. Using a sample of small audit firms each involved in a single merger during 2004-2016, we find consistent evidence that post-merger audit quality decreases when PCAOB-identified audit deficiencies and audit fees are used as proxies for audit quality. In addition, we find weak evidence of lower post-merger audit quality when examining discretionary accruals, and no conclusive postmerger audit quality effect for the probability of misstatements. Overall, our findings provide evidence regarding the audit quality consequences of some small audit firm mergers in the United States.

Original Publication Citation

"The Audit Quality Effects of Small Audit Firm Mergers in the United States", Auditing: A Journal of Practice and Theory, Edition 2, Volume 42, American Accounting Association, 2023