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Big 4 Conservatism Around the World

  • Richard Chung
  • Michael Firth
  • Jeong-Bon Kim
  • Lei Pang
Chapter
Part of the CSR, Sustainability, Ethics & Governance book series (CSEG)

Abstract

Conservatism is a long-established underlying principle of accounting but its implementation has come under the spotlight in recent years following the spate of well-publicized corporate collapses in the U.S. and elsewhere. Previous studies have shown that the Big 4 audit firms are more conservative than the non-Big 4 in the U.S. The current study examines whether the U.S. findings extend to other countries. In doing so, we make use of a relatively new measure of conservatism, namely, the C-score developed by Khan and Watts. We find that the conclusion drawn from U.S. studies, namely that the Big 4 are more conservative, extends to the international setting but only under certain conditions. Specifically, the Big 4 are more conservative in those countries where litigation and reputation risks, broadly defined, are high. This increase in conservatism represents a rational response by the Big 4 auditors to their greater exposure, vis-a-vis the non-Big 4 auditors, to litigation and reputation loss in those countries.

Keywords

Investor Protection Audit Firm Inside Trading Litigation Risk Conservative Accounting 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Notes

Acknowledgement

We thank Jong-Hag Choi, Jere Francis, Annie Qiu, Dan Simunic, and participants at the PhD/DBA Research Seminars at The Hong Kong Polytechnic University and City University for constructive comments on earlier versions of the paper. The usual disclaimer applies.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • Richard Chung
    • 1
  • Michael Firth
    • 2
  • Jeong-Bon Kim
    • 3
  • Lei Pang
    • 4
  1. 1.Department of Accounting, Finance and EconomicsGriffith UniversityGold CoastAustralia
  2. 2.Department of Finance and InsuranceLingnan UniversityTuen MunHong Kong
  3. 3.Department of AccountancyCity University of Hong KongKowloonHong Kong
  4. 4.Department of Finance and Decision SciencesHong Kong Baptist UniversityKowloonHong Kong

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