Influence of Auditor Office Size on Earnings Prediction

This paper investigates the notion that auditors from larger offices perform better and more complete audits. The central question is whether earnings audited by such auditors have better predictive value for either future earnings or for future cash flows. Evidence of a significant nonlinear relation is found for Big4 audit firms between the predictive value of both abnormal and normal accruals. Results suggest that the predictive value of both accrual components decline as office size moves from small to medium, and the predictive value increases as office size moves from medium to large. The decline may be attributed to a combination of capacity stress and excessive reputation concerns. The increase in predictive value may be related to a combination of additional independence and office level audit resources, both of which are in greater supply for larger offices than for smaller or medium sized offices