Effect of Office Size on Audit Quality

Abstract

Several studies have been conducted to determine if there is a correlation between audit quality and audit office or firm size. By their very nature, larger audit firms have access to a larger human resource pool, can maintain economic independence, and generally have a more favorable public reputation. Smaller audit firms are perceived by the general public to have a disadvantage by nature. Their human resource pools, and thereby access to industry knowledge and experience, are limited. Smaller audit offices also have a higher probability of economic dependence due to smaller clientele bases. The author takes the standpoint that, based on the factors outlined above, larger audit firms are in a better position to perform a higher quality audit.

Effect of Office Size on Audit Quality

Since the passage of the Sarbanes-Oxley Act (SOX) in 2002, the general public has become aware of the necessity for a higher standard of audit quality. As a result, auditing firms have been placed under increased scrutiny by the Public Company Accounting Oversight Board (PCAOB) and all stakeholders who have a vested interest in a firm’s financial statements. However, measuring audit quality is not a quantitative task. It is not tangible. There are no metrics to assist in the prediction of audit success or failure. Additionally, there are very differing views of what an audit is. Public perception is that audits should provide absolute assurance of the validity of the financial statements. Those within the audit profession know that there are no absolute assurances when auditing a client’s financial statements.

In lieu of measurable, qualitative metrics, stakeholders and governing agencies look to other indicators of audit quality. Generally, “if an audit firm has a low rate of litigation, gets very good ratings on peer reviews, and seldom has to reissue audit opinions, then one can infer that it performs high-quality audits”...