{"title":"Breaking the Big Four brand’s halo effect precisely: evidence from the association between RMM coverage ratios and integrated audit effectiveness","authors":"","doi":"10.1007/s11156-023-01238-0","DOIUrl":null,"url":null,"abstract":"<h3>Abstract</h3> <p>This research examines what proportion of Big Four auditors underperform in integrated audit settings and why. Incorporating the inverse relation between detection risk and assessed risk of material misstatement (RMM) per the classic audit risk model, we create an RMM coverage ratio to measure how many times the total audit effort expended covers pre-existing RMM—the higher the ratio, the larger the margin for errors. We then partition the RMM coverage ratios in each industry into Deciles (0–9). Empirical analyses corroborate that, given the risk-based audit approach strictly executed, only the Big Four auditors of higher Deciles (2–9) increase the likelihood of integrated audit effectiveness. This evidence indicates that due to a small margin for errors (e.g., RMM coverage ratios ≤ 2.31), 20% of Big Four auditors are less likely to adequately assess or address risks to deliver an engagement, breaking the Big Four brand’s halo effect precisely.</p>","PeriodicalId":47688,"journal":{"name":"Review of Quantitative Finance and Accounting","volume":"1 1","pages":""},"PeriodicalIF":1.9000,"publicationDate":"2024-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Review of Quantitative Finance and Accounting","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1007/s11156-023-01238-0","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This research examines what proportion of Big Four auditors underperform in integrated audit settings and why. Incorporating the inverse relation between detection risk and assessed risk of material misstatement (RMM) per the classic audit risk model, we create an RMM coverage ratio to measure how many times the total audit effort expended covers pre-existing RMM—the higher the ratio, the larger the margin for errors. We then partition the RMM coverage ratios in each industry into Deciles (0–9). Empirical analyses corroborate that, given the risk-based audit approach strictly executed, only the Big Four auditors of higher Deciles (2–9) increase the likelihood of integrated audit effectiveness. This evidence indicates that due to a small margin for errors (e.g., RMM coverage ratios ≤ 2.31), 20% of Big Four auditors are less likely to adequately assess or address risks to deliver an engagement, breaking the Big Four brand’s halo effect precisely.
期刊介绍：
Review of Quantitative Finance and Accounting deals with research involving the interaction of finance with accounting, economics, and quantitative methods, focused on finance and accounting. The papers published present useful theoretical and methodological results with the support of interesting empirical applications. Purely theoretical and methodological research with the potential for important applications is also published. Besides the traditional high-quality theoretical and empirical research in finance, the journal also publishes papers dealing with interdisciplinary topics.
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