The geographic decentralization of audit firms and audit quality

Beck, Matthew J.; Gunn, Joshua L.; Hallman, Nicholas

doi:10.1016/j.jacceco.2019.101234

Cited by 62 publications

(49 citation statements)

References 44 publications

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“…A potential barrier between the United States and other countries is their geographic proximity. Recent studies have found negative consequences of geographic dispersion in an auditing context, generally concluding that geographic dispersion creates information asymmetries and ineffective monitoring (Beck et al 2019;Choi et al 2012;DeFond et al 2018;Dong et al 2018). Greater geographic barriers make it more difficult for lead and component auditors to interact when questions or problems arise, and cooperation and knowledge sharing may suffer (Beck et al 2019).…”

Section: Geographic Barriersmentioning

confidence: 99%

“…Recent studies have found negative consequences of geographic dispersion in an auditing context, generally concluding that geographic dispersion creates information asymmetries and ineffective monitoring (Beck et al 2019; Choi et al 2012; DeFond et al 2018; Dong et al 2018). Greater geographic barriers make it more difficult for lead and component auditors to interact when questions or problems arise, and cooperation and knowledge sharing may suffer (Beck et al 2019). Opportunities for U.S. lead and component auditor team members to share information through informal channels, observe cues, receive feedback and social support, develop a shared identity, and understand the interdependence of their work are additionally limited by geographic barriers (Downey and Bedard 2019a; Hanes 2013).…”

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

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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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Section: Geographic Barriersmentioning

confidence: 99%

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

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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“…The data were gathered using a questionnaire; it consists of 12 questions regarding the research factors adopted from previous studies. For instance, AIS includes 4 adapted from Ayoub, Potdar, Rudra, and Luong (2020) and (Napitupulu, 2018), organizational culture include 4 items adapted from Gonzá lez-Rodrí guez, Martí n-Samper, Kö seoglu, and Okumus (2019) , Adeinat Iman and Abdulfatah Fatheia (2019), and Di Stefano, Scrima, and Parry (2019); and internal audit quality items adapted from Agyei-Mensah Ben (2019), Dao, Xu, and Liu (2019), and Beck, Gunn, and Hallman (2019). The respondents were asked to test their insight into the five-point Likert-scale research frameworks in which 5 symbolized 'strongly agree,' 4 symbolized 'agree,' 3 symbolized 'Neutral,' 2 symbolized 'Disagree,' and 1 symbolized 'Strongly disagree.'…”

Section: Methodsmentioning

confidence: 99%

Impact of Accounting Information System on Internal Audit Quality: Mediating Role of Organizational Culture

Alawaqleh

2020

IJFR

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This study advances the Accounting Information System (AIS) study by exploring the relationship between the AIS internal audit quality. It develops a model based on literature and considers one significant variable of mediation that is organizational culture. The AIS is expected to influence internal audit quality in different contexts, particularly in developing countries. The research model validated using AMOS and SPSS version 25. Based on a sample of 183 internal auditors in Jordanian industrial SMEs, empirical findings support the relationship between AIS and internal audit quality; however, the impact is direct while the organizational culture partially mediates this relationship. The results indicate that the AIS help enhance internal auditors' quality and the organizational culture, ultimately improving internal audit quality. The implications are useful for academics, administrators, and policymakers interested in evaluating the impact of intervening variables on the AIS and the internal audit quality relationship.

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“…;Agarwal and Hauswald 2010;Ayers et al 2011;Kedia and Rajgopal 2011). Consistent with this view, prior research finds that local auditors provide higher-quality than non-local auditors(Choi et al 2012;Lundstrom and Yore 2017;Francis et al 2018;Beck et al 2019).…”

mentioning

confidence: 90%

Do Lenders Care Who Did the Audit?

Zhang¹

2020

Preprint

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While non-U.S. auditors audit a significant proportion of U.S.-based clients, until recently, lenders were largely unaware of the involvement of component auditors since the U.S.-based lead auditor was not required to disclose information about participating auditors. Using the disclosure under Form AP mandated by the PCAOB, we find that the increase in cost of debt ranges from 15 basis points to 22 basis points when component auditors are used relative to engagements that do not involve component auditors. We also find that cost of debt is greater when the component auditor has GAAP-related audit deficiencies and fewer CPAs, face PCAOB disciplinary orders or more frequent inspection, and when the lead auditor and the component auditors are not from the same Big 4 audit networks. These findings are consistent with the notion that lenders associate lower audit quality and higher information risk with certain attributes of component auditors. Further, the component auditor's superior local knowledge mitigates cost of debt for firms with high foreign operations. We also conduct an event study and find an adverse bond market reaction around the first-time disclosure of Form AP.

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The geographic decentralization of audit firms and audit quality

Cited by 62 publications

References 44 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*

Impact of Accounting Information System on Internal Audit Quality: Mediating Role of Organizational Culture

Do Lenders Care Who Did the Audit?

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