Estimating the value added by Big 8/6/5 auditors using earnings and cash response coefficients

Abstract

This paper estimates the value added by Big 8/6/5 auditors after controlling for the permanent and non-permanent impact of earnings and cash flows using linear and nonlinear (arctan) regression models. The linear model shows significant value added for industrial firms that utilise Big 8/6/5 auditors; while an arctan model shows that large auditors value-add by attesting to the permanence of earnings for large firms. We demonstrate that refinements to the audit research can be made by using response coefficients to filter out the different timing components inherent in earnings and cash flows.