Do Joint Audits Improve or Impair Audit Quality?

Abstract

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision because “Two heads are better than one.” Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because, in that situation, joint audits induce a free‐riding problem between audit firms and reduce audit evidence precision. We further derive a set of empirically testable predictions comparing audit evidence precision and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.

The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests

“…Deng et al. () model the effect of joint audits on audit fees, audit evidence precision, and auditor independence. They compare two types of joint auditor pairs, Two Big‐Firm Auditors (BB) and One Big‐Firm Auditor paired with one Small‐Firm Auditor (BS), with One Big‐Firm Auditor (B).…”

“…Deng et al. () neither directly compare auditor independence between BB and BS pairs nor consider the effect of coordination on the performance of joint auditor pairs.…”

Improving Sustainability through a Dual Audit System

“…Meanwhile, foreign share firms with dual audit experience did not show much change in the distribution of risk-aversion, even after the dual audit system was abolished. That is, there was no change in the number of small loss enterprises, and the number of small profit enterprises increased by only 6.67% (8), even after the end of the dual audit system.…”

“…Because a joint audit model requires two independent auditors to jointly issue a unified audit report, when the audit fails, the responsibilities of the two auditors cannot be clearly identified, which is the most obvious disadvantage of a joint audit. Deng et al [8] and other researchers found that a joint audit has always resulted in the phenomenon that auditors with lower competence get a "free ride" by relying on the auditors with higher competence; this weakens auditing independence, since an audit report issued jointly by two independent auditors of different capabilities is the result of mutual negotiation. In 2003, the South Korean Government also considered introducing a joint audit model, but it was never implemented because no relevant measures could be proposed to clarify the responsibilities between the auditors.…”

“…We conducted a longitudinal analysis for foreign share companies to compare the dual audit period and the period after the dual audit was abolished. This corresponds to a comparative analysis of (3) and (6) versus (4) and (8) in Figure 2. Thus, if Hypothesis 1 is supported, the regression results for DUAL should show a significantly negative correlation during the period the dual audit system was implemented.…”