TY - JOUR
T1 - EY and KPMG merger
T2 - How strong are relationships among board members and their audit partners? A network perspective
AU - Kacanski, Slobodan
AU - Klarskov Jeppesen, Kim
AU - Wang, Peng
PY - 2023
Y1 - 2023
N2 - This study investigates the avenue of outcomes that followed up the process of joining the operations between two audit firms in Denmark—Klynveld Peat Marwick Goerdeler (KPMG) and Ernst & Young (EY)—in 2014, under the EY label. In this research, we study clients’ behavior to audit staff defection in the auditor selection context to identify the impact of the change that occurred in the market for audit services on engagement partner selections. Company behaviors to the newly formed situation are examined against the tendency toward each of the following three behavioral patterns: (a) staying with the same audit firm, (b) following the engagement partner’s switch to another audit firm, and (c) selecting a third auditor. Utilizing the cutting-edge methodology for social network analysis called exponential random graph models (ERGMs), we study the relevant reactions in the period from 2012 to 2017. Results show that, at the audit firm level, earlier KPMG clients preferred to stay with the newly established KPMG. On the contrary, at the audit partner level, former KPMG clients had a strong tendency to follow their incumbent partners who had decided to switch to EY. Finally, those KPMG clients that decided to rotate audit firms did not commit this rotation to follow their incumbent partners.
AB - This study investigates the avenue of outcomes that followed up the process of joining the operations between two audit firms in Denmark—Klynveld Peat Marwick Goerdeler (KPMG) and Ernst & Young (EY)—in 2014, under the EY label. In this research, we study clients’ behavior to audit staff defection in the auditor selection context to identify the impact of the change that occurred in the market for audit services on engagement partner selections. Company behaviors to the newly formed situation are examined against the tendency toward each of the following three behavioral patterns: (a) staying with the same audit firm, (b) following the engagement partner’s switch to another audit firm, and (c) selecting a third auditor. Utilizing the cutting-edge methodology for social network analysis called exponential random graph models (ERGMs), we study the relevant reactions in the period from 2012 to 2017. Results show that, at the audit firm level, earlier KPMG clients preferred to stay with the newly established KPMG. On the contrary, at the audit partner level, former KPMG clients had a strong tendency to follow their incumbent partners who had decided to switch to EY. Finally, those KPMG clients that decided to rotate audit firms did not commit this rotation to follow their incumbent partners.
KW - The Big-Four
KW - KPMG
KW - Ernst & Young
KW - auditor selection
KW - auditor-client relationship
KW - social network analysis
KW - The Big-Four
KW - KPMG
KW - Ernst & Young
KW - auditor selection
KW - auditor-client relationship
KW - social network analysis
U2 - 10.1177/0148558X231175285
DO - 10.1177/0148558X231175285
M3 - Journal article
SN - 0148-558X
VL - online first
JO - Journal of Accounting, Auditing, and Finance
JF - Journal of Accounting, Auditing, and Finance
ER -