Do Joint Audits Improve or Impair Audit Quality?

47 Pages Posted: 18 Jul 2012 Last revised: 16 Apr 2017

See all articles by Mingcherng Deng

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Tong Lu

University of Houston

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Minlei Ye

University of Toronto - Rotman School of Management; University of Toronto at Mississauga - Department of Management

Date Written: August 26, 2014

Abstract

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision, because “Two heads are better than one,” and by enhancing auditor independence, because it is more expensive for a company to “bribe” two audit firms 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 (1) induce a free-riding problem between audit firms, lowering audit evidence precision, and (2) create an opportunity for internal opinion shopping, compromising auditor independence. We further derive a set of empirically testable predictions comparing audit evidence precision, auditor independence, 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.

Keywords: joint audits, audit quality, precision, auditor independence, audit fees

JEL Classification: M42, M48

Suggested Citation

Deng, Mingcherng and Lu, Tong and Simunic, Dan A. and Ye, Minlei, Do Joint Audits Improve or Impair Audit Quality? (August 26, 2014). Rotman School of Management Working Paper No. 2111710; CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2111710 or http://dx.doi.org/10.2139/ssrn.2111710

Mingcherng Deng

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Tong Lu

University of Houston ( email )

Houston, TX 77204
United States

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Minlei Ye (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga - Department of Management ( email )

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