Auditor Multinational Expertise and Audit Quality

Gunn, Joshua L.; Michas, Paul N.

doi:10.2139/ssrn.3028146

Cited by 4 publications

(9 citation statements)

References 26 publications

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“…In fact, many issuer‐years that do not list any foreign subsidiaries use a component auditor. Nevertheless, to allow comparisons between our studies, we conduct our H1 COMPONENT‐USE analysis using the Gunn and Michas (2018) foreign subsidiary criteria instead of country mentions in the 10‐K. Results are consistent, with one exception.…”

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confidence: 78%

“…30 30 Before component auditor information was available, Gunn and Michas (2018) identify multinational operations as firms with nonzero foreign sales and at least one foreign subsidiary reported in Exhibit 21. We observe in our data that subsidiary locations reported in Exhibit 21 are often not material or complex enough to demand component auditor use.…”

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confidence: 99%

“…For instance, since component auditor identities and locations are not available in Australia, Carson et al (2019) examine the average rule of law of subsidiaries. Gunn and Michas (2018) similarly measure the proportion of significant subsidiaries located in weak rule of law countries.…”

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confidence: 99%

“…22 22 Rule of law is commonly examined in business literature (e.g., Levie and Autio 2011; Licht et al 2007; Nwabuzor 2005; Srinivasan et al 2015) and reflects the extent to which individuals believe and abide by the rules of their society, such as its contract enforcement, property rights, law enforcement, the judicial system, and the likelihood of crime and violence (World Bank 2016). Several recent studies have used the rule of law of subsidiary countries to proxy for institutional differences from the lead auditor's home country (Carson et al 2019; Dyreng et al 2012; Gunn and Michas 2018). For instance, since component auditor identities and locations are not available in Australia, Carson et al (2019) examine the average rule of law of subsidiaries.…”

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confidence: 99%

See 3 more Smart Citations

The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures*

Burke

Hoitash

2020

Contemporary Accting Res

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This paper investigates the common, yet previously opaque, practice of using foreign audit firms (component auditors) to conduct portions of audit work for U.S. public companies. U.S. regulators have expressed concern for the transparency and quality of audits using component auditors. Employing data disclosed in the newly mandated PCAOB Form AP, we find that component auditor use is largely structural, determined by the size and complexity of clients' multinational operations. We do not find that the mere use of component auditors is detrimental to audit outcomes, but rather the amount of work conducted by component auditors is associated with lower audit quality (i.e., higher likelihood of misstatement), higher likelihood of nontimely reporting, and higher audit fees, which collectively suggest that component auditor engagements are associated with adverse outcomes. Furthermore, we find that only the work performed by less competent component auditors and those facing geographic and cultural/language barriers, including significant geographic and cultural distance, weak rule of law, and low English language proficiency, is associated with adverse audit outcomes. Overall, these findings provide initial archival evidence that the use of certain component auditors on U.S. multinational audits is associated with audit coordination issues, which suggests that PCAOB Form AP disclosures provide relevant information.

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confidence: 78%

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confidence: 99%

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confidence: 99%

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confidence: 99%

See 2 more Smart Citations

The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures*

Burke

Hoitash

2020

Contemporary Accting Res

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“…Academic researchers have also used the information in Exhibit 21 to study, among other phenomena, tax avoidance (Dyreng and Lindsey [2009]), audit coordination across jurisdictions (Gunn and Michas [2017]), and earnings management (Dyreng, Hanlon, and Maydew [2012]). Despite its frequent use as a proxy for geographic exposure, little is understood about the quality of the disclosure, and anecdotal evidence suggests that firms may not fully comply with the requirement to disclose the name and location of all significant subsidiaries.…”

Section: Introductionmentioning

confidence: 99%

Strategic Subsidiary Disclosure

Dyreng

Hoopes

Langetieg

et al. 2020

J of Accounting Research

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Although subsidiary disclosures in firms' filings with the Securities and Exchanges Commission (SEC; Exhibit 21) represent the most granular required public disclosure of a firm's geographic footprint, little is understood about the quality of the disclosure, and anecdotal evidence suggests firms may not fully comply with the disclosure requirements. We use data provided by multinational firms to the Internal Revenue Service regarding their foreign subsidiary locations to explore the accuracy of public subsidiary disclosures on

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Challenging Global Group Audits: The Perspective of US Group Audit Leads*

Downey

Westermann

2021

Contemporary Accting Res

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Regulators are concerned about the quality of group audits because of poor inspection results, recent enforcement actions against component auditors, and the significance of these audits to the global economy. Yet research in this area is nascent. In response, we survey and interview US‐based global group audit leads to better understand the group audit process and their perceptions of challenges that arise on such engagements. Our findings indicate that group auditors organize their audits consistent with the client's structure, which drives component auditor selection, scoping, and fees. Group auditors routinely find fault with component auditors, perceiving that work performed and/or documentation provided is not sufficient, not appropriate and/or not communicated timely, to comply with US standards and reporting deadlines. In some cases, they perceive that the component auditor is unable and/or unwilling to comply and in others, that the component auditor misunderstands group instructions due to language proficiency or differing interpretation of the standards. Notably this perspective is ethnocentric, as group auditors almost exclusively attribute issues to component auditors. While ethnocentric tendencies appear myopic, they provide insight into unrecognized or overlooked aspects of the global firm model of cooperative arrangements. This study highlights the significance of the global firm's network structure to global group audits. Thus, we encourage intercommunity research, among (quantitative and qualitative) scholars and standard setters, to consider group audits in the broader context of firm networks.

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Auditor Multinational Expertise and Audit Quality

Cited by 4 publications

References 26 publications

The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures*

The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures*

Strategic Subsidiary Disclosure

Challenging Global Group Audits: The Perspective of US Group Audit Leads*

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