Working Paper: Does the Organization and Culture of the Largest Audit Firms Influence their Audit Quality and Efficiency?

​​​​Paper author: Daniel Aobdia

Research focus: How much influence do the quality control systems of large audit firms have on audit quality and audit efficiency? Economic theory and anecdotal evidence from the collapse of Arthur Andersen suggest the possibility of an important link between a system of quality control, firm culture and audit quality. Yet until now, very little analysis has been performed on the influence of audit firm quality control systems, mainly due to a dearth of public data.

In this study Daniel Aobdia responds to the need for more research in this area by providing some of the first empirical evidence on the role of large audit firm quality control systems. More specifically Aobdia provides answers to the following important questions. Are deficiencies in audit firm quality control systems associated with lower audit quality? How does a firm's quality control system impact audit efficiency and profitability? What is the specific role of audit firm culture and audit methodology? And do clients show signs of dissatisfaction when an audit firm has more quality control problems?

Overall, the evidence presented suggests that an audit firm's system of quality control – in particular its culture and methodology – is important for audit quality. Audits conducted by firms with worse quality controls systems are also less efficient and less profitable. Hours greatly increase for audit firms that have deficiencies in their methodologies, suggesting that deficient methodologies lead to inefficient execution of engagements. These results also suggest an unusual consequence of regulation of the audit industry, in the form of potential profit improvements for large audit firms once they remediate quality control deficiencies identified by the PCAOB. In this particular context, this goes against the conventional wisdom that regulation is costly for regulated entities.

In a final set of tests, Professor Aobdia assesses whether clients show any sign of dissatisfaction when auditors have worse quality control systems. Deficiencies in quality control systems could reasonably be expected to have some consequences visible to the client, such as poorer audit process quality and more difficult interactions with the audit team. Consistent with this idea, Aobdia finds that clients of audit firms with worse quality control systems are more likely to switch auditors the following year.

Download the Paper