If financial statements from one company to another aren't as comparable as they ought to be, it could be tied to who audited them.

A recent academic study suggests financial statements are most comparable when they are audited by the same Big 4 firm. The comparability drops a notch when otherwise similar companies are audited by different Big 4 firms, and then it drops another notch when the audit is conducted by a firm outside the Big 4. In Auditor Style and Financial Statement Comparability, a trio of academics studied financial statement results and determined there are differences depending on the audit style or the specific audit approach of the firm conducting the audit, especially among the Big 4.

The authors expected to find similar accruals and earnings structures among similar companies that operate in the same industry sector. After factoring for firm-specific factors and other unrelated factors, the authors found this to be especially true when companies were audited by the same Big 4 accounting firm, which the academics say is evidence of an audit firm style having an effect on accruals and earnings.

The Financial Accounting Standards Board and the International Accounting Standards Board have been working for more than a decade to bring U.S. and international accounting rules into greater harmony to reduce the problem of incomparability in global capital markets. “Our study documents that the role of an economic agent, the auditor, is also important in facilitating the production of accounting comparability,” the authors said. They believe the “Big 4 style effect” results from each firm having its own set of in-house rules for how to interpret and implement accounting and auditing standards.

The authors say not only does comparability slip from one Big 4 firm to the next, but it also diminishes when comparing companies audited by Big 4 auditors compared with those audited by firms outside the Big 4. The authors expected this finding because Big 4 audit firms have a greater capacity to incur the fixed costs of developing standardized in-house rules for implementing auditing standards and enforcing Generally Accepted Accounting Principles.

The study notes each of the Big 4 firms has developed its own library of resources, like Deloitte's Technical Library and Roadmap series, Ernst & Young's Global Accounting and Auditing Information Tool, KPMG's Accounting Research Online, and PwC's Accounting Guides, and each firm says its resources represent a guide for interpreting and applying GAAP. The firms may have developed the resources for their own use internally, but they also make them available to clients, the authors write.

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