This dissertation consists of three essays that present new evidence on auditor competencies to deliver high audit quality using various auditor attributes, including auditor size, audit firm competencies and industry specialization. In the first essay, I provide new evidence on the influential role of external auditors in enhancing the informativeness of 10-K reports. Specifically, I find that the client’s choice of Big 4 auditors contributes to cross-sectional variations in 10-K disclosure volume. I also find that the benefit of enhanced disclosures provided by Big 4 auditors (PwC, EY, KPMG and Deloitte) is more pronounced for audit clients with poorer accrual quality and those with higher information asymmetry. Additionally, I introduce the portion of 10-K length unexplained by operating complexity and observable clients’ characteristics as an alternative proxy for audit efforts. I employ this measure because abnormally long disclosures induce external auditors to reduce the risk of material misstatement through additional audit effort, as evidenced by higher audit fees and the increased likelihood of going-concern opinions. In the second essay, I provide new evidence on audit pricing differences within the Big 4 audit firms in the U.S. market. I estimate an audit fee model and consistently show that the positive coefficient for PwC is significantly larger than those of the other Big 4 audit firms. This result indicates that PwC earns above-average audit fee premiums relative to the other Big 4 audit firms. Because the industry expertise research stream argues that an audit firm with greater competency will be able to differentiate itself from its competitors in terms of within-industry market share and charge an audit fee premium for its services, I reveal that PwC has maintained its leadership position as the market share leader across most industries in the U.S. market. More importantly, I find that the evidence of an industry specialization premium is consistently observed for the group of PwC specialists, but not for the group of other (non-PwC) specialists. In the third essay, I provide further evidence on audit quality differences at the inter-audit firm level. Unlike other studies that implicitly assume a homogeneous level of audit quality within the Big 4 firms, I reveal that the existing differences among the Big 4 firms lead to cross-sectional variations in audit quality as measured by earnings quality and going-concern audit opinions. Specifically, I find that the negative relationship between PwC and accrual quality appears to be larger for PwC clients than for those of EY clients. I also find that EY clients are less likely to receive a going-concern audit opinion in both the full sample and a subsample of severely financially distressed firms. Consistent with the evidence of an industry specialization premium in the second essay, I find that the association between industry expertise and higher audit quality is consistently observed for the group of PwC specialists, but not for the group of other specialists. Considered together, these results reinforce the importance of individual audit firm competencies, particularly the PwC effect, and suggest that not all Big 4 audit firms are the same.
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Thesis advisor: Hrazdil, Karel
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