This study investigates experimentally how mutual monitoring affects effort when employees are compensated via rank‐order tournaments. Theory and anecdotal evidence suggest that mutual monitoring may either decrease effort by facilitating collusion or increase effort by stimulating competition. In our first experiment, we find that mutual monitoring increases effort, because participants do not attempt to collude but rather behave competitively. This result leads us to expand our theory and develop hypotheses to predict that the effect of mutual monitoring depends on whether employees have the inclination to collude or compete. Specifically, we predict that mutual monitoring decreases effort when employees are inclined to collude and increases effort when employees are inclined to compete; that is, mutual monitoring will not change the basic inclination created by the workplace setting, but will “turn up the volume” on the effect that such inclination has on effort. Consistent with our predictions, our second experiment finds that mutual monitoring leads to lower effort when participants have a collusive inclination and (eventually) higher effort when they have a competitive inclination. Overall, the results from these two experiments suggest that allowing employees to observe each other's productive effort in tournament incentive settings may have positive or negative consequences for the firm, depending on whether environmental factors predispose employees to collude or compete.

Francis and Yu (2009) and Choi, Kim, Kim, and Zang (2010) report evidence that Big 4 audits are of higher quality when the engagement office is of larger size. Specifically, client earnings quality is higher and auditors in larger offices are more likely to issue going‐concern audit reports. We extend this line of research to test if larger Big 4 offices have fewer client restatements. A client restatement provides more direct evidence of a low‐quality audit than earnings quality metrics or going‐concern reports, because a restatement indicates the client's auditor did not effectively enforce the correct application of GAAP at the time the original financial statements were issued. We analyze 2,557 firm‐year restatements in a sample of 23,190 financial statements originally issued by U.S. firms from 2003 to 2008. We find that Big 4 office size is associated with fewer client restatements after controlling for innate client characteristics that may affect restatements (client size, financial performance, industry membership, nonfinancial measures, off‐balance sheet activities, and market‐related measures), and a set of controls for other auditor factors such as fees and industry expertise. The study raises important questions about the ability of smaller offices to deliver high‐quality audits for SEC registrants.

Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross‐country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non–Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non–Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.