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Audit Quality and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypotheses
Author(s) -
Lennox Clive S.
Publication year - 1999
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00275
Subject(s) - reputation , audit , accounting , incentive , economic rent , business , quality audit , quality (philosophy) , empirical evidence , auditor independence , actuarial science , economics , joint audit , internal audit , microeconomics , social science , philosophy , epistemology , sociology
Empirical studies have shown that large auditors are more accurate than small auditors. The reputation hypothesis states that large auditors have more incentive to be accurate because an inaccurate report may lead to a loss of client‐specific rents (DeAngelo, 1981). The deep pockets hypothesis states that large auditors should be more accurate because they have greater wealth at risk from litigation (Dye, 1993). This paper presents evidence on the relationship between auditor size and litigation and on the market shares of criticised and uncriticised auditors – the findings give greater support to the deep pockets hypothesis than the reputation hypothesis.