The Impact of Benefit Plan Audits on the Financial Statement Audit
46 Pages Posted: 18 Jul 2018 Last revised: 4 Sep 2019
Date Written: August 31, 2019
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 improves the likelihood that the firm will be selected as a company’s financial statement auditor in the future. Additional analysis indicates that performing benefit plan audits is a way for not just Big 4, but also small audit firms to get a “foot in the door” with potential financial statement audit clients. 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 perform an additional analysis that provides evidence that the performance of the benefit plan and financial statement audits by the same auditor reduces the likelihood of switching financial statement auditor, consistent with the joint provision of these services creating greater bonding and higher switching costs. 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
Suggested Citation: Suggested Citation