Examining the Relationship Between Audit Firm Size and Financial Statement Quality in the Banking Sector

Posted: Jan 21, 2016

• Evelyn Mitchell
• Grace Garcia
• Grace Nguyen

Abstract

The relationship between audit firm size and financial statement quality represents a fundamental question in accounting research that has significant implications for financial regulation, market efficiency, and corporate governance. Traditional auditing literature has predominantly operated under the assumption that larger audit firms deliver superior audit quality due to greater resources, specialized expertise, and stronger reputational capital at stake. However, the banking sector presents a unique context that challenges these conventional assumptions. Banking institutions operate under distinct regulatory frameworks, exhibit complex financial structures, and possess systemic importance that may alter the dynamics of the audit quality relationship. This research addresses critical gaps in the existing literature by developing a more sophisticated methodological approach to measuring financial statement quality and examining the nuanced relationship with audit firm size in the banking context. We move beyond traditional binary classifications of Big Four versus non-Big Four audit firms and instead employ a continuous scaling