Are big four audits in ASEAN countries of higher quality than non-big four audits?

Abstract

We investigate whether reputation concerns provide sufficient incentive for Big Four auditors to provide higher quality audits in ASEAN countries where litigation exposure is low or nonexistent. We proxy audit quality based on the quality of reported earnings (earnings conservatism) to examine whether Big Four auditors provided higher quality audits (relative to non-Big Four auditors) during 1990–96. To neutralise the potential confounding effects of cross-border differences, we investigate the relative quality of Big Four vs. non-Big Four audits within each country separately so that each country serves as its own control. Our results suggest that although both Big Four and non-Big Four auditees report conservative earnings in all countries, only in the US do Big Four auditees report more conservative earnings than non-Big Four auditees. Thus, although the World Bank and UNCTAD (1999) did not express concerns about Big Four audit quality in emerging markets until 1999, the evidence suggests that the Big Four were not providing higher quality audits in ASEAN countries even prior to the 1997 Asian financial crisis. Our findings are interesting in the context of the ongoing globalisation of capital markets in which cross-border investors in emerging markets, separated from corporate management not only geographically but often culturally and linguistically, are presumed to rely on a brand name Big Four audit to provide enhanced assurance on financial statements.

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