Recent research provides evidence consistent with tax-motivated income shifting taking place in Big 4 networks. Non-Big 4 networks have global footprints and audit a significant proportion of private-firm clients. Thus, we cannot make sense of audit-firm networks' tax avoidance proclivities and the impacts their tax advice may have on aggregate client-firm income-shifting figures without examining non-Big 4 affiliates' tax planning strategies. This study uses a private-firm dataset of Big 4 and non-Big 4 associated firms from 26 European countries finding evidence consistent with non-Big 4 affiliates being more aggressive income shifters than their Big 4 counterparts. Using a battery of supplemental analyses we demonstrate that the negative association between Big 4 membership and tax-motivated income shifting is weaker when network exposure to the political costs of aggressive tax planning is lower. We also show that political cost considerations are more likely to moderate debt allocation policies in Big 4 than non-Big 4 networks. Our findings suggest that political cost considerations are an important driver of the relation between Big 4 affiliation and tax-motivated income shifting even in our setting where firm size is strongly positively associated with tax expertise, political power, and global footprint and have important implications for anti-avoidance legislation.

We use a novel dataset that links audit-firm and client-firm financial statement information from the U.K.'s largest audit firms to examine drivers of audit-firm profitability and its implications for audit outcomes. We first explore the determinants of audit-firm profitability and conclude that Big-4 and non-Big-4 audit firms have fundamentally different profitability structures. Big-4 firms have higher profit margins than non-Big-4 firms. Furthermore, Big-4 profitability increases with client size and complexity, while non-Big-4 profitability is higher for smaller, private-firm clients. Next, we examine the relation between audit-firm profitability and audit outcomes. Using a battery of alternative outcome measures, we find that more profitable audit firms deliver higher audit quality. In supplemental analyses we show that the positive relation between audit-firm profitability and audit outcomes is generally stronger for more influential and illiquid clients (i.e. when auditors are exposed to more litigation risk). Our inferences are robust to several endogeneity controls, such as using an instrumental variables approach, controlling for client-firm and audit-firm fixed effects, employing lead-lag and changes specifications, and assessing bias from correlated omitted variables. Our study contributes to the literature by being the first to provide insights into audit-firm profitability and examine in detail its implications for audit quality.

The Big Four accounting firms are widely respected for their professionalism and their role in ensuring the independent credibility of financial reports. In the USA, to ensure high levels of auditor independence, government oversight agencies such as the SEC and the PCAOB have been entrusted with the task of monitoring the activities of accounting firms as well as those of their clients. However, large accounting firms are allowed to donate and lobby the authorities. This occurs at a national level, local level through offices, and on an individual basis. This has raised questions on the impact of political ties on the quality of audits and the maintenance of proper conduct. New research shows that given the risk to reputation and credibility, the Big Four are likely to maintain quality. However, political ties influence the level of independence an audit firm has.

Big 4 accounting firms are frequently identified as the architects of income-shifting structures. However, while the role of accounting firms in advising clients in this regard has been examined, their own activities have received little attention. For reasons of risk management, Big 4 networks claim to be a loose amalgam of national offices but have all necessary expertise and ample opportunities to allow for tax-motivated profit shifting among network firms. Public interest expectations, however, are unlikely to be met if those who are hired to advise multinational corporations on tax matters themselves embody aggressive proclivities.

We examine the relation between auditor size and audit quality for a sample of U.K. private firms. Private firms prioritize tax considerations over reducing information asymmetry in their financial reporting. We find that Big 4’s private clients exhibit higher levels of discretionary accruals and lower precision of accrual estimates than non-Big 4’s private clients. Although Big 4 auditors are less tolerant of income-increasing earnings management, they leave more room for downward earnings management and their private clients are able to engage in greater tax avoidance. These results are stronger for standalone firms than for business groups as the latter’s greater demand for stakeholder communication motivates Big 4 auditors to increase audit quality. Collectively, our evidence suggests that Big 4 auditors adjust audit quality in a more competitive segment of the audit market where client firms generally perceive the benefit from tax minimization to outweigh the cost of reduced earnings informativeness.

The research problem We examine the association between financial reporting quality and trade credit capital for a large sample of European private firms. Furthermore, we explore how information asymmetry and credit rationing moderate the link between financial reporting quality and trade credit financing. Motivation Trade credit constitutes one of the most important sources of financing for private firms. Nevertheless, prior research has provided few and inconclusive evidence of the link between financial reporting quality and private firms' trade credit capital. Our study is further motivated by the recent calls for more research on the determinants of the relation between financial reporting quality and trade credit financing (e.g., Hope & Vyas (2017)). The test hypotheses H-1: There is a positive association between financial reporting quality and private firms' access to trade credit capital. H-2a: The relation between financial reporting quality and private firms' access to trade credit capital is more positive when information asymmetry and uncertainty about future cash flows are high. H-2b: The relation between financial reporting quality and private firms' access to trade credit capital is more positive when credit is rationed. Target population Policymakers who seek to improve accounting standards and customize them to the financial reporting needs of private firms and their stakeholders (e.g., international financial reporting standards for small and medium-sized enterprises), private firm managers, and private firm suppliers. Adopted methodology Ordinary Least Squares regression analyses. Analyses We examine the association between financial reporting quality and trade credit financing for a large sample of private firms from Europe's five largest economies, i.e., France, Germany, Italy, Spain, and the United Kingdom. Our sample period spans from 2010 to 2016. We use the Amadeus database as our source of data. We regress trade credit capital on three proxies for financial reporting quality. In cross-sectional analyses, we repeat our main estimations by interacting our proxies for financial reporting quality with proxies for information asymmetry and credit rationing. Findings We find strong evidence that high-quality financial reporting is associated with more trade credit financing in private firms. We further show that the positive relation between high-quality financial reporting and trade credit is stronger when information asymmetry and uncertainty about future cash flows is high as well as when credit is rationed. These findings suggest that suppliers complement insider communication channels and financial reporting quality and provide a more nuanced understanding of the interplay among information asymmetry, credit rationing, and trade credit financing.

Extant literature suggests that audit firms establish political connections at the national level to lobby regulators and legislators. In this paper we construct a novel dataset of Big 4 auditors' political connections at the audit office level and examine the implications of auditors' political connections for their audit quality. We find that client firms of politically connected audit offices are less likely to restate their earnings. However, this relation is weaker for politically connected clients. Further analyses reveal that, during the years that are subsequently restated, connected clients of connected offices were able to contract for less audit effort and pay less audit fees relative to their non-connected counterparts. Our results, robust to alternative audit quality measures and endogeneity controls, suggest that, while connected auditors have incentives to deliver high audit quality, they are likely to compromise their independence for politically connected clients.

Accounting research on tax has primarily focused on documenting the income shifting strategies of multinational corporations. However, no studies, as far as we are aware, have hitherto explored how large accountancy firms manage their own tax affairs despite being huge economic entities in their own right. Using a unique private firm dataset of Big 4 affiliated firms from 30 European countries we examine whether the Big 4 shift income among their separate legal entities. Despite apparent disincentives to doing so, we find archival evidence consistent with tax-motivated income shifting. Difference-in-difference specifications around the incorporation of Deloitte EMEA in the U.K. and PwC Europe in Germany provide further evidence consistent with income shifting increasing among Deloitte and PwC affiliates subsequent to the incorporation of their respective regional coordinating entities. In cross-sectional analyses we find evidence consistent with incentives to engage in outbound income shifting being weaker for unprofitable affiliates. We also provide evidence consistent with the Big 4 engaging in income shifting only in countries with favorable tax conditions/weak tax enforcement. Finally, we find evidence in line with debt allocation and intangible asset placement being important channels through which the Big 4 achieve their income shifting objectives. Our study contributes to the literature by being the first to open the black box of the Big 4’s own tax planning practices.

We examine the relation between auditor size and audit quality for a sample of U.K. private firms. Private firms prioritize tax considerations over reducing information asymmetry in their financial reporting. We find that Big 4’s private clients exhibit higher levels of discretionary accruals and lower precision of accrual estimates than non-Big 4’s private clients. Although Big 4 auditors are less tolerant of income-increasing earnings management, they leave more room for downward earnings management and their private clients are able to engage in greater tax avoidance. These results are stronger for standalone firms than for business groups as the latter’s greater demand for stakeholder communication motivates Big 4 auditors to increase audit quality. Collectively, our evidence suggests that Big 4 auditors adjust audit quality in a more competitive segment of the audit market where client firms generally perceive the benefit from tax minimization to outweigh the cost of reduced earnings informativeness.