Auditing: A Journal of Practice & Theory Vol. 29, No. 1 May 2010 pp. 73–97
American Accounting Association DOI: 10.2308/aud.2010.29.1.73
Audit Office Size, Audit Quality, and Audit Pricing
Jong-Hag Choi, Chansog (Francis) Kim, Jeong-Bon Kim, and Yoonseok Zang
SUMMARY: Using a large sample of U.S. audit client firms over the period 2000–2005, this paper investigates whether and how the size of a local practice office within an audit firm hereafter, office size is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality is measured by unsigned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other based on a total of audit fees earned by each office. Our results show that the office size has significantly positive relations with both audit quality and audit fees, even after controlling for national-level audit firm size and office-level industry expertise. These positive relations support the view that large local offices provide higher-quality audits compared with small local offices, and that such quality differences are priced in the market for audit services. Keywords: audit office; office size; audit quality; audit pricing. Data Availability: Data are publicly available from sources identified in the paper. The way we think about an accounting firm changes dramatically when we shift the unit of analysis away from the firm as a whole, to the analysis of specific city-based offices within a firm. In terms of DeAngelo’s 1981b argument, a Big 4 accounting firm is not so big when we shift to the officelevel of analysis. For example, while Enron represented less than 2 percent of Arthur Ander-
Jong-Hag Choi is an Associate Professor at Seoul National University, Chansog (Francis) Kim is an Associate Professor and...