Tendency to Choose Big Audit Firms: Case of Indonesia

Abstract

This paper investigates the tendency of companies to choose a big audit firm as their external auditor under the condition of their income smoothing tendency and risk tolerance to business and financial risks. Using 2,240 company-year observations listed on the Indonesian Stock Exchange, it generally reveals that companies with lower tendency to smooth earnings and companies with intolerable risk tend to choose big audit firms. These results are also consistent after controlling the asset size of companies (clients). In addition, companies would tend to show indifferent preference when the opportunistic and non-opportunistic income smoothing tendencies are in the same proportion. This paper also implies that audit firms tend to accept audit offers from clients with intolerable risk but with greater asset size to compensate higher risk. The situation where big audit firms accept clients with intolerable risk level indicates that non-big audit firms are not capable of doing so and audit firms in Indonesia operate in weak litigation environment.

Keywords:   income smoothing tendency, business and financial risk tolerance, client size, audit firm size