EY and KPMG Merger: How Strong are Relationships among Board Members and their Audit Partners? A Network Perspective

Slobodan Kacanski*, Kim Klarskov Jeppesen, Peng Wang

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

110 Downloads (Pure)

Abstract

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.
Original languageEnglish
JournalJournal of Accounting, Auditing & Finance
Number of pages32
ISSN0148-558X
DOIs
Publication statusPublished - 6 Jun 2023

Bibliographical note

Epub ahead of print. Published online: 06 June 2023

Keywords

  • The Big4
  • KPMG
  • EY
  • Auditor selection
  • Auditor–client relationship
  • Social network analysis

Cite this