Association of Discretionary Accruals and Big 4 Client Firms: Evidence from India

Abstract

This paper examines whether discretionary accruals of the company are related with the auditing done by Big 4 auditors of the company. This paper analysed empirically all the listed companies in Bombay Stock Exchange available under the database CMIE- Prowess during the year 2001- 2015. It consists of 8,724 firm- year observations, amongst 950 are Big 4 Client Firms and the rest, 7774 are Non-Big 4 Client Firms. The empirical results reveal that the absolute Discretionary accrual is higher in Non- Big 4 client firms as compared to Big 4 client firms. Further, the Discretionary accrual and Absolute discretionary accrual is found to be significantly associated with Big 4 client firms. Going forward, the significant absolute discretionary accrual in univariate analysis turned insignificant in multivariate analysis when other factors were added. The factors, for instance profitability, cash flow from operations and size are found to be higher in Big 4 client firms as compared to Non- Big 4 firms.