Auditor Style and Financial Statement Comparability

• Published in: The Accounting review Vol. 89; no. 2; pp. 605 - 633
• Main Authors: Francis, Jere R., Pinnuck, Matthew L., Watanabe, Olena
• Format: Journal Article
• Language: English
• Published: Sarasota American Accounting Association 01.03.2014
• Subjects: Accounting; Accounting firms; Accounting standards; Accruals; Auditing; Auditing standards; Auditors; Audits; Big Four accounting firms; Business audits; Cash flow; Causal covariation; Companies; Earnings; Enforcement; Enterprises; Financial accounting; Financial audits; Financial reporting; Financial statements; GAAP; Generally accepted accounting principles; Samples; Studies; U.S.A; United States > US
• ISSN: 0001-4826; 1558-7967
• DOI: 10.2308/accr-50642

The term "audit style" is used to characterize the unique set of internal working rules of each Big 4 audit firm for the implementation of auditing standards and the enforcement of GAAP within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele.