Do Big 4 audits affect conditional conservatism under IFRS? International Evidence

Abstract

This paper examines whether Big 4 audits affect conditional conservatism around the world under mandatory IFRS regime. We use a broad sample of firms required to follow IFRS in their financial reporting from 22 countries over the period 2005-2020. We hypothesize that clients of Big 4 auditors are more conditionally conservative than clients of non-Big 4 auditors under mandatory IFRS. We document a significant "Big 4 effect" on timely loss recognition, consistent with our expectations. However, time series and cross-country analysis reveal that the Big 4 effect is far from universal. Specifically, we only document the Big 4 effect in three sample years and only in two countries (Luxembourg and the UK). Overall, our findings suggest that conditional conservatism remains strong under the IFRS reporting regime, but there are signs of the demise of the Big 4 effect. These findings have implications for investors, standard-setting bodies, and corporate governance.

Keywords: asymmetric timeliness, conditional conservatism, international accounting, financial reporting quality

JEL Classification: F30, G15, M41, M42