The Role of Big 6 Auditors in the Credible Reporting of Accruals

Posted: 2 Feb 1999

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Edward L. Maydew

University of North Carolina at Chapel Hill

H. Charles Sparks

University of Alaska Fairbanks - School of Management (SOM)

Abstract

This study investigates if the likelihood of hiring a Big 6 auditor is increasing in the firm's endogenous propensity to generate accruals. High-accrual firms have greater scope for aggressive and/or opportunistic earnings management and therefore have an incentive to hire a brand name Big 6 auditor to provide assurance that reported earnings are credible. For a large sample of NASDAQ firms over the period 1975-1994 we find that the likelihood of using a Big 6 auditor is increasing in firms' endogenous propensity for accruals. Even though Big 6 audited firms have higher levels of total accruals, we also find they have lower amounts of estimated discretionary accruals. These findings are robust to several specifications of discretionary accruals. These findings are consistent with Big 6 auditors constraining aggressive and potentially opportunistic reporting by firms with high levels of accruals.

JEL Classification: M41, M43, M49

Suggested Citation

Francis, Jere R. and Maydew, Edward L. and Sparks, H. Charles, The Role of Big 6 Auditors in the Credible Reporting of Accruals. Available at SSRN: https://ssrn.com/abstract=147752

Jere R. Francis (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

H. Charles Sparks

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
Fairbanks, AK 99775-0500
United States
907-474-6537 (Phone)
907-474-5219 (Fax)

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