Do Big 4 Auditors Enhance Audit Quality in China? A ‘‘Behind the Scenes Look’’

We contribute to the debate on whether the ‘‘Big N effect’’ on audit quality is due to client self-selection by controlling for pre-audit earnings quality. Using data from the Chinese Institute of Certified Public Accountants, we find that pre-audit earnings quality is higher for Big 4 clients. Controlling for pre-audit earnings quality, restatement frequency is lower for Big 4 clients than for non-Big 4 clients, but there is no significant difference in discretionary accruals between Big 4 and non-Big 4 clients. Our findings indicate that Big 4 and non-Big 4 auditors in China pursue different strategies to enhance audit quality. The Big 4 enhance audit quality by recruiting and retaining clients with higher earnings quality and acting more conservatively toward clients with a higher risk for earnings restatement. In contrast, non-Big 4 auditors enhance audit quality by requiring more downward audit adjustments.