The Impact of Benefit Plan Audits on the Financial Statement Audit

Abstract

Benefit plan audits, a material but less understood public accounting service, represent a non-audit service that is “audit-related.” We explore the implications of benefit plan audits for the financial statement audit. We find that performing a benefit plan audit for a company significantly increases the likelihood that the firm will be selected as a company’s financial statement auditor in the future, particularly for smaller audit firms. Further, we find that companies that engage the same audit firm for both their benefit plan and financial statement audits have a significantly lower likelihood of misstatements and shorter audit report lags. Finally, we find evidence consistent with the joint provision of these services creating greater bonding and higher switching costs for the financial statement audit. Our findings speak to the continued debate over effective market expansion of financial statement audit providers, audit quality determinants, and audit efficiencies.

Keywords: auditor choice; audit quality; audit-related services; benefit plan audits; switching costs

JEL Classification: M4, M40, M41, M42, M49