Assessing Auditing Firms

Bigger is not necessarily better when it comes to auditing firms for private companies in the public acquisition market. A recent study by James DiGabriele of the Department of Accounting, Law, and Taxation rebuts previous research that brand name auditors provide higher assurance and credibility to the audited financial statements of companies with little or no trading history.

graph looked at through a microscopeDiGabriele explains that private sellers often attempt to achieve parity with public targets in the acquisition market to maximize sales price. Past research indicates that private sellers who engage a larger audit firm will create the perception of a higher level of assurance, quality, and credibility. The results of DiGabriele's study, however, indicated that the price of a privately held company did not vary as a function of the audit firm performing the audit.

"In light of this research, the established view from major professional accounting groups is that audits are the same regardless of the audit firm," he explains. As part of the study two analyses were performed comparing private companies audited by the largest ten accounting firms vs. all others, and Big 5 (now Big 4) firms opposed to the remaining.

DiGabriele believes the shifting of tides is caused by three factors: exceptional knowledge of local markets now offered by smaller firms, the trusted advisor relationship established at small firms, and enhanced client services.

"The study imparts evidence that auditor reputation and perceived audit quality in the acquisition of private companies does not increase the sale price of comparable private markets," he says.