Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality? A Firm- and Office-level Analysis

Prior research on the audit quality effects of Big N audit firm mergers is sparse. In this study, we examine the effects of the 1998 merger of Price Waterhouse (PW) and Coopers & Lybrand (CL) on the audit quality of PricewaterhouseCoopers (PwC) at both the firm- and the local office-levels, where audit quality is surrogated by the auditor’s propensity to issue a going concern opinion and the client’s discretionary accruals and accruals quality. At the firm-level, we find only weak evidence of an increase in audit quality for the merged firm (PwC) relative to the audit quality of the pre-merger component firms (PW and CL). At the office-level, we find stronger evidence of an increase in audit quality following the merger but only at the firm’s overlapping local offices, i.e., PwC offices in cities where both PW and CL had separate offices prior to the merger. Following the merger, these overlapping offices immediately increased in size as a result of merging the pre-existing (but separate) PW and CL local offices. Overall, the evidence suggests that Big N mergers increase audit quality only to the extent that there is an increase in office size.