In-Network Auditors and Foreign Subsidiaries’ Investment Efficiency

Abstract

This paper examines the impact of appointing in-network auditors (i.e., audit firms from the same global audit firm network) in business groups on the investment efficiency of subsidiaries. We use a sample of European business groups for which we observe the parent and both domestic and foreign subsidiaries. Our findings reveal that an audit by in-network auditors does not affect the investment efficiency of domestic subsidiaries but leads to improvements in the investment efficiency of foreign subsidiaries. Specifically, external audits by in-network auditors are associated with a reduced likelihood and reduced extent of over-investments by foreign subsidiaries. While prior research mostly focuses on the role of auditors in providing financial reporting assurance within business groups, our study shows that in-network auditors provide audits with more added value by enhancing subsidiary investment efficiency.

Keywords: group audit, auditor alignment, interface between auditing and managerial accounting, internal information quality, common auditor

JEL Classification: M41, M42