Abstract

This study investigates whether the Big 4 auditors really provide the good audit quality comparedto Non－Big 4 auditors. This study examines the relationship between the Big 4 and audit quality,focusing on the endogeneity on determining auditor. Big 4 auditors might provide the superior auditservice, and the client’s discretionary accruals, proxy for audit quality, is lower than that of Non－Big 4. And Non－Big 4 auditors might provide the poor audit service, and the client’s discretionaryaccruals is higher than that of Big 4. But the clients which have already made the earningsmanipulation might prefer to the Non－Big 4 auditor for opinion shopping. Thus there might beendogeneitgy issue between auditor and discretionary accruals. This study focuses the endogeneityissue for verifying the relationship between the auditor size and audit quality. We sample thecompanies (in total 7,098) listed in the KOSPI and KOSDAQ stock market(2005－2010), excludingthe financial companies. Based on a comprehensive sample, first, we find that Big 4 auditors have higher audit qualitythan Non－Big 4 without controlling the endogeneity, however the result is different whenconsidering the endogeneity on determining the auditor. Thus, when considering the endogeneity,Big 4 auditors have lower discretionary accruals and higher accruals quality, and higher realearnings management. It means that Big 4 auditors provide the superior audit service on earningsmanagement through accruals, however Big 4 auditors do not provide the better audit service onearning management through real activities manipulations. Thus Big 4 auditors cannot alwaysprovide the better audit service than Non－Big 4. These results provide that Non－Big 4 auditorsconsider the earnings management through both accruals and real earnings manipulations for betteraudit service. Second, this study subdivides the auditor’s size into Big 4, medium, and small, not dichotomyof view, Big 4 and Non－Big4 like previous literatures. We find that there are significantdifferences of audit quality within Big 4 auditors, representing that it’s necessary to reconsider Big－4 auditor’s audit quality that provide the superior audit service. And we find that the audit qualityof medium is not bad for that of Big 4, specially in KOSDAQ market medium auditors provide the better audit service than Big 4. These results mean that it’s necessary to reconsider the auditquality of Non－Big 4 auditors which provide the poor audit service, because there are significantdifferences of audit quality within Non－Big 4. This study contributes for regulators and auditorsto make the direction of developing the policies of accounting industry focusing on Big 4 auditor.

Keywords

• Big 4
• Non－Big 4
• Audit Quality

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