The Audit Quality Effects of Small Audit Firm Mergers in the United States

Increased audit regulation, coupled with reports of frequent mergers among smaller audit firms, creates a dynamic environment in which to assess changes in the U.S. audit market. We examine the audit quality consequences of audit firm mergers between small audit firms that audit public clients, a topic about which little is known. Using a sample of small audit firms each involved in a single merger during 2004-2016, we find consistent evidence that post -merger audit quality decreases when PCAOB-identified audit deficiencies and audit fees are used as proxies for audit quality. In addition, we find weak evidence of lower post-merger audit quality when examining discretionary accruals, and no conclusive post-merger audit quality effect for the probability of misstatements. Overall, our findings provide evidence regarding the audit quality consequences of some small audit firm mergers in the United States.