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Higher quality 6” x 9° black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. Bell & Howell information and Leaming 300 North Zeeb Road, Ann Arbor, Mi 48106-1346 USA 800-521-0600 UMI L Temple University Doctoral Dissertation Submitted to the Graduate Board Title of Dissertation: Differences in Audit Quality Among Audit Firms: (Please type) An Examination Using Bid-Ask Spreads Author: Paul Christian Schauer (Please type) Date of Defense: July 16, 1999 (Please type) Dissertation Examining Committee: (please type) Read and Approved By: (Signatures) Jagan Krishnan D7. Asthana Roland Lipka Morris G.
Heiberger degree of Doctor of Philosophy. Date_22/ — @ean of the Graduate School) Differences in Audit Qualitv Among Audit Firms: An Examination Using Bid-Ask Spreads A Dissertation Submitted to the Temple University Graduate Board in Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY by Paul Christian Schauer August, 1999 UMI Number: 9955857 Copyright 1999 by Schauer, Paul Christian All rights reserved. UMI ® UMi Microform9955857 Copyright 2000 by Bell & Howell Information and Learning Company. All rights reserved.
This microform edition is protected against unauthorized copying under Title 17, United States Code. Belt & Howell Information and Leaming Company 300 North Zeeb Road P. Box 1348 Ann Arbor, Mi 48106-1346 © by Paul Christian Schauer 1999 All Rights Reserved ill ABSTRACT Title: Differences in Audit Quality Among Audit Firms: An Examination Using Bid-Ask Spreads Candidate’s Name: Paul Christian Schauer Degree: Doctor of Philosophy Temple University, 1999 Doctoral Advisory Committee Chair: Dr. Jagan Krishnan A large prior literature has argued auditor size is positively associated with audit quality.
These studies have used a number of different measures to proxv for audit quality. This dissertation examines differences in audit quality across audit firms, using clients’ bid-ask spreads as the measure of audit qualitv. The bid-ask spread, defined as the difference between the ask price and the bid price for a company’s stock, has been shown to be positively associated with the extent of information asymmetry about the firm (Stoll 1989). Because the role of an audit is the reduction of information risk (Boynton and Kell 1996.
36) and therefore information asymmetry, it is argued audit quality is negatively associated with a firm’s bid-ask spread. This dissertation examines differences in audit quality for a three-tier classification of audit firms; Big 6, National, and other audit firms. Differences in audit quality among individual audit firms are also examined. The results of the tests provide evidence that the Big 6 and National firms provide a higher quality audit than non-National audit firms, but there is no discernible difference in the level of audit quality between the Big 6 and National firms.
Weak evidence is also provided that the level of audit quality is not homogenous within the Big 6 as had been assumed bv previous research. iV In addition to examining brand name and inter-firm differences in audit quality, intra-firm differences in audit quality are also examined. Wallman (1996) points out that when assessing issues relating to audit quality, the focus should be on the office or other unit of the firm making the audit decisions with respect to an individual audit client. Partners within a firm may be subject to different financial incentives, which can compromise their independence.
These financial incentives may be dependent upon the size of the partner’s resident office when the audit firm's partner compensation plan is dependent upon the local office financial results. This dissertation finds no evidence that office size impacts the level of audit quality within a Big 6 firm. These results may be partially explained by fundamental differences in the size and number of clients for large and small offices of the firms. ACKNOWLEDGEMENTS [ would like to thank my dissertation chair, Jagan Krishnan for his patience.
support and guidance throughout my doctoral program. [ would also like to thank the other members of my committee, Roland Lipka, Sharad Asthana, Marilyn Greenstein. and Richard Heiberger. [ have benefited from the comments of Eric Press and other participants at the Temple University research workshops.
[ would like to especially like to thank my wife, Joni, for her encouragement. understanding, and support, both emotional and financial, during my doctoral studies. A spectal thanks to my wife Joni and my two children. and Libby, for the manv sacrifices they have made during my doctoral studies in order that [ could achieve my dream.
TABLE OF CONTENTS Page ABSTRACT. vi LIST OF TABLES. IX LIST OF FIGURES. MOTIVATION FOR THE STUDY AND JUSTIFICATION FOR USING BID-ASK SPREAD AS A MEASURE OF AUDIT QUALITY.
Motivation for the Study. Justification for the Use of the Bid-AskK Spread as a Proxy for Audit Quality. A REVIEW OF THE BID-ASK SPREAD LITERATURE. a A REVIEW OF THE AUDIT QUALITY LITERATURE.
Proxies Involving Perceptions of Audit Quality.2, Other Proxtes of Audit Quality. Direct Measures of Audit Quality. DEVELOPMENT OF HYPOTHESES. Summary Description of the Model.
wen eee es 6. DESCRIPTION OF THE DATA AND THE RESULTS OF TESTS. Description ofthe Data. Results of Hypothesis Testing.
Vili LIST OF TABLES Table Page 1. Overview of the Bid-Ask Spread Literature. 19 Overview of Audit Quality Research. 2 Summary of Audit Qualitv Rankings for Big 6 Firms.
a Description of the Variables. Data Selection Statistics. Sample Statistics, Entire Population. Sample Statistics, Big Six Firms.
Sample Statistics, National Firms. Sample Statistics, Other Audit Firms. Sample Statistics of Market Value and Sample §Size° By Exchange, Audit Firm Tvpe. and Audit Firm.
¬ Pearson Correlation Coefficients for the Independent Variables. Eigenvalues, Condition Indexes, and Variance Inflation Factors of the Model for Audit Firm Type. Results of Regression Analysis for Audit Firm Type and Audit Firm. 66 Results of Hypotheses Tests of the¢ Equality of Coefficients, Coopers & Lybrand vs.
bec cee cee eee cee cee cee cee cee eee ceeeeee 67 15. Results of se paheses Tests of the© Equality ofof Coefficients,* Big 6 vs. Results of Hypotheses Tests of the Equality ‹ of Coefficients, McGladrey vs. Other National Firms.
Results of Regression Analysis for Audit Firm Type and Audit Firm, 74 Observations Selected Randomly. ne eee cee cen eee cee cee een eeueee iX 18. Results of Regression Analvsis for Percentage of Partners of the Audit Firm Resident in the Office Signing the Opinion. Distribution of Partners Within Offices and the Distribution of Big 6 Offices.
Results of Regression Analysis for Audit Firm Type and Audit Firm Controlling for the Effect of Exchange on the. Coefficients of the Independent Variables "4. 80 Sensitivity Analysis, Results of Regression Analysis for Industry Specialist, Industries Audited Exclusively by the ws 6, and the Effect of Companies Changing Audit Firms. cee eee teense Sensitivity Analysis, Descriptive Statistics for Industrv Specialization and Industries Audited Exclusively by the Big 6.
Sensitivity Analvsis, Descriptive Statistics for Auditor Changes. Sensitivity Analysis, Results of Regression analysis for Periods Subsequent to the Earnings Announcement Date or the Date the Company’s 10K was Received by the SEC. Results of Regression Analvsis for Companies in the Lower Sixty-Seven Percent of Market Value and Companies Below the Median Market Value. " 83 LIST OF FIGURES Figure Page i.
An Example of a Company’s Information Set for Different Levels of Audit Quainy. 10 Summary of the Relation Berween Audit Quality and Bid-Ask Spread. i Overview Flowchart of the Data Collection Process. tod Xi CHAPTER 1 INTRODUCTION A large prior literature has argued that auditor size is positively associated with audit quality.
These studies have used a number of different measures to proxy for audit quality. This dissertation examines differences in audit quality across audit firms. using clients’ bid-ask spreads as the measure of audit quality. The bid-ask spread.
defined as the difference between the ask price and the bid price for a company’s stock. has been shown to be positively associated with the extent of information asymmetry about the firm (Stoll 1989). Because the role of an audit is the reduction of information risk (Boynton and Kell 1996, 36) and therefore information asymmetry, it is argued in this study that audit quality is negatively associated with a firm’s bid-ask spread. This dissertation extends previous research in three significant ways.
First, by focusing on the impact of the audit on information asvmmetry, this study uses a more direct measure of audit quality. Proxies for audit quality used in prior work are generaily indirect in nature, for example, audit fees (Anderson and Zeghal 1994. Francis and Simon 1987), the propensity for litigation (Palmrose 1988), the earnings response coefficient (Teoh and Wong 1993), discretionary accruals (Becker et al.' Direct measures of audit quality used in prior research only address one facet of audit quality, for example, the accuracy of insurance companies’ claim loss reserve estimates (Petroni and Beasley 1996) or compliance with Generally Accepted Accounting Principles in the presentation of financial statements (Krishnan and Schauer 1999). The results of these studies have provided evidence that Big 6 firms provide a higher quality audit than the non-Big 6 firms.” Second, in addition to looking at Big 6 / non-Big 6 differences, this dissertation examines the inter-firm differences in the level of audit quality among the Big 6, and large non-Big 6 audit firms.
Prior work assumes implicitly that audit quality is homogeneous within the Big 6 and non-Big 6 subgroups. However, audit quality may also differ among audit firms, both Big 6 and non-Big 6. For example, the differences in audit approaches used by the Big 6 (Morris and Nichols 1988; Kinney 1986) suggest the possibility that the firms may differ on audit quality as well. Similarly, product differentiation (Simunic and Stein 1987) may lead to differing levels of audit qualitv.
Previous research has focused almost entirely on Big 6 / non-Big 6 differences in audit quality. A limited number of studies that examined intra-Big 6 differences (Davidson and Neu 1993: Balvers, McDonald. and Miller 1988: Paimrose 1988) do not find significant differences in audit quality among the Big 6 audit firms.’ In this study, the _ bid-ask spread is used to examine differences among the Big 6 firms as well as among large non-Big 6 firms. Third, in addition to examining brand name and inter-firm differences in audit quality, this dissertation also examines intra-firm differences in audit quality.
Wallman (1996) points out that when assessing issues relating to audit quality, the focus should be on the office or other unit of the firm making the audit decisions with respect to an individual audit client. Partners within a firm may be subject to different financial incentives, which may compromise their independence. These financial incentives may toa be dependent upon the size of the parmer’s resident office when the audit firm’s partner compensation plan is dependent upon the local office financial results.* This dissertation examines the effect office size has on the level of audit quality for Big 6 audit firms.
