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...