Prior research suggests that the Big 4 audit firms are of higher quality than are non‐Big 4 firms. However, existing tests for an association between audit firm size and reporting accuracy are indirect and provide mixed results. Our study extends this line of research by examining whether the Big 4 audit firms exhibit higher quality reporting by having fewer “audit‐reporting errors” in the context of issuing going‐concern modified reports. Our analyses examine both types of going‐concern reporting errors (i.e., type I errors—modified opinions rendered to subsequently viable clients; and type II errors—unmodified opinions rendered to subsequently bankrupt clients) over an 11‐year period. We also examine reporting error rate differences between the national second‐tier firms and regional/local third‐tier firms.
Our findings indicate that both type I and type II error rates for Big 4 audit firms are significantly lower compared to non‐Big 4 firms. In contrast, we find no significant differences between the national second‐tier and regional/local third‐tier audit firms with respect to either type of reporting error. Our results provide evidence about a Big 4 audit quality difference in reporting on client's going‐concern problems.
