The 'Big N' Audit Quality Kerfuffle

Published on Oct 13, 2021in Social Science Research Network
· DOI :10.2139/SSRN.3511585
William M. Cready18
Estimated H-index: 18
(UTD: University of Texas at Dallas)
Sources
Abstract
In a highly influential analysis, Lawrence, Minutti-Meza, and Zhang (2011), LMZ henceforth, report that statistically significant relations between a firm’s choice of a Big N auditor and three audit quality metrics (discretionary accruals, cost equity capital, and analyst forecast accuracy) turn “insignificant” after application of matching (propensity score and size) designs. LMZ, however, in interpreting these outcomes mistakenly identify the difference between statistically significant and statistically insignificant as significant (Gelman and Stern, 2006). This analysis re-examines the LMZ evidence descriptively. It finds that little descriptive support exists in the LMZ evidence for conclusive assertions regarding the “insignificance” of audit quality proxy level differences between Big N and non-Big N auditors. Nor does its evidence provide a reliable basis for thinking that propensity score matching based assessment of these differences produces substantially closer to zero inferences about them relative to inferences obtained from existent (inclusive of LMZ provided estimates) conventional non-matching design based multiple regression assessments. Indeed, the LMZ evidence is most appropriately interpreted as providing broad robustness support for the insights provided by such models.
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