Auditor Multinational Expertise and Audit Quality

Abstract

Over the past several decades, the scope of public companies' operations has become increasingly global. This has led to concern over the ability of audit firms to conduct high-quality audits across geographically dispersed foreign operations. We contribute to the growing body of research in this area by investigating the association between audit quality and local audit offices' expertise in conducting multinational audit engagements. We use two complementary measures to proxy for an audit office's multinational expertise: (1) local multinational market leadership, and (2) country-specific experience. Using a sample of multinational client firms headquartered in the United States, we consistently find that audit quality is stronger when the auditor possesses expertise conducting global group audits, possesses particular expertise in the country where a client has a significant subsidiary, or possesses both types of expertise on an engagement. Several sample partitions reinforce our main results. The results are robust to propensity score matching, as well as a placebo test using clients of the audit office that generate no foreign sales. Our evidence suggests that the challenge of conducting multinational audits is more easily met by auditors with expertise on these types of engagements. JEL Classifications: M40; M42; F23. Data Availability: All data used are publicly available.

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

“…Specifically, these component auditors are small non-U.S. firms with limited experience on U.S. audits (Dee et al 2015), which may explain the finding that the disclosure of component auditors is associated with adverse audit outcomes. similarities and differences between country-pairs (e.g., Barrios et al 2019;Gunn and Michas 2018), we next explore the usefulness of component auditor information by considering whether component auditors operating in locations with varying geographic and cultural/language barriers and possessing varying levels of competence are differentially associated with audit outcomes.…”

PCAOB Form AP: Leveraging Information about Audit Personnel

“…Carson, Simnett, Trompeter, and Vanstraelen (2018) report that audit fees in Australia increase with the use of participating auditors, and that audit quality improves after the implementation of International Standard on Auditing (ISA) 600 for engagements where non-Big 4 firms serve as the primary auditor. Other related research shows that primary auditors can develop expertise in engagements involving participating auditors (Gunn and Michas 2018) and that issuer size and global structure contribute to challenges on engagements involving participating auditors (Downey and Bedard 2018a). What other questions can researchers answer using audit participant data?…”

Strategic Subsidiary Disclosure

“…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.…”