Involvement of Component Auditors in Multinational Group Audits: Determinants, Audit Quality and Audit Fees

Abstract

We study what determines the involvement of component auditors in multinational (MNE) group audits and associated audit quality and fees. Using unique Australian disclosures of group audit fees paid to the principal and component auditors, we first document that MNE complexity, degree of MNE internationalization, and auditor characteristics are associated with component auditor involvement, and extent and type of component auditor involvement. Next, we find that involvement of component auditors benefits audit quality as long as the principal auditor conducts a substantial amount of work. However, a higher extent of component auditor involvement is associated with lower audit quality. We also document that audit fees are higher in the presence of a component auditor and increase with the extent of involvement, irrespective of the type of component auditor. Our results contribute to the emerging literature on group audits and provide empirical evidence on regulatory concerns about group audit quality.

Keywords: group audits; component auditors; global audit firm networks; audit quality; audit fees

JEL Classification: M49