Are 'Big Four audits' really better? - Some remarks on the 'Big Four dichotomy' in the German audit market

In the green paper 'Audit policy: lessons from the crisis' of 2010, the European Commission discussed a break up of Big Four audit firms, since high market concentration was considered as a threat to independency. Our results suggest that concentration in the market for audits of German listed companies is persistently high. Regarding audit quality, clients of Big Four auditors show significantly lower amounts of discretionary accruals and lower likelihoods of error findings by the German enforcement system than clients of non-Big Four firms. When controlling for firm-specific characteristics, the difference remains observable only for the enforcement-error-proxy. The results suggest that differences in discretionary accruals might not primarily be influenced by auditor choice, but by different firm-characteristics between Big Four and non-Big Four clients. Nevertheless, while Big Four auditors might not be able to better constrain earnings management than non-Big Four auditors, they seem to be more successful in preventing 'real' accounting mistreatments, indicating higher audit quality.