Customer perceptions of the “Big 4 effect”: Evidence from the world’s largest customer—the U.S. government

We explore the impact of Big 4 auditors on U.S. government contract allocation decisions. We find that contractors switching from non-Big 4 to Big 4 auditors see an average 0.70% increase in their share of a government agency’s total awards (i.e., $3.20 million from each government agency each year), relative to those switching within non-Big 4 or Big 4 auditors. The effect is more pronounced (1) for contractors whose majority of awarded contracts are either cost-plus or competitive, where audit quality plays a more important role; and (2) for contractors whose switch to Big 4 auditors is not due to auditor resignations, which could compromise audit quality. Our findings hold after controlling for firm characteristics that potentially trigger an auditor switch and after conducting a batch of robustness tests. Collectively, the results suggest that the “Big 4 effect” exists in the U.S. government procurement market, a phenomenon undocumented in the literature.