Involvement of Component Auditors in Multinational Group Audits: Determinants and Audit Outcomes

Abstract

We study the determinants of involvement of component auditors (either network and/or unaffiliated) in multinational (MNE) group audits and associated audit outcomes. We identify the involvement of component auditors, 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 determine the extent and type of component auditor involvement. Next, we find that increased involvement of component auditors is associated with lower audit quality and higher audit fees. We then investigate the impact of the revision of the international auditing standard related to group audits, which expanded the principal auditor’s responsibilities, and show that, while this reduced the involvement of unaffiliated (but not network) auditors, quality problems remain.

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

JEL Classification: M49