The Audit Quality Effects of Small Audit Firm Mergers in the United States

Increased audit regulation, coupled with practitioner reports of “hyper-acquisitive” behavior among smaller firms, creates a dynamic environment in which to assess changes in the U.S. audit market. Against this backdrop, we examine the consequences of small audit firm mergers on audit quality, a topic about which little is known. We find that audit quality declines after small audit firm merger events. Specifically, we find that PCAOB-identified audit deficiencies and the absolute value of discretionary accruals increase and audit fees decrease. Further, it appears that this decline in audit quality occurs primarily among the new clients obtained through the merger, as well as when the acquiring firm is growing rapidly, suggesting a focus on growth over quality. Taken together, our results provide evidence regarding the negative consequences of small audit firm mergers in the United States