Big N Audit Quality Effect: New Evidence on Audit Hours and Audit Adjustments

Using a unique data set on audits of Chinese companies, this paper examines the Big N audit quality effect by comparing the audit processes of Big N and non-Big N auditors. We document that Big N audits involve significantly more audit hours with higher per-hour fees but do not result in more audit adjustments. In fact, Big N audits have a significantly higher percentage of cases with no audit adjustments at all. Big N audits also have fewer subsequent restatements. Collectively, this evidence suggests that Big N firms play a significant disciplinary role by performing more time-consuming and costly audits. Anticipating such stringent audits, clients of the Big N increase the quality of their reports ex ante, resulting in fewer audit adjustments and higher-quality financial reports.