Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

Posted: 7 Dec 2013 Last revised: 18 Oct 2014

See all articles by Carol Callaway Dee

Carol Callaway Dee

University of Colorado Denver

Ayalew Lulseged

University of North Carolina (UNC) at Greensboro

Tianming Zhang

Florida State University - Department of Accounting

Date Written: September 2, 2014

Abstract

We empirically test whether audit quality is affected when part of an SEC issuer’s audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB’s proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

Keywords: Audit quality, participating auditor, Investor perception, PCAOB

JEL Classification: M41

Suggested Citation

Dee, Carol Callaway and Lulseged, Ayalew and Zhang, Tianming (Tim), Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings (September 2, 2014). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2364152 or http://dx.doi.org/10.2139/ssrn.2364152

Carol Callaway Dee (Contact Author)

University of Colorado Denver ( email )

1475 Lawrence St.
Campus Box 165, PO Box 173364
Denver, CO 80217-3364
United States

Ayalew Lulseged

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

Tianming (Tim) Zhang

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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