US-Listed Foreign Companies’ Choice of a US-Based Versus Home Country-Based Big N Principal Auditor and the Effect on Audit Fees and Earnings Quality

Posted: 8 Aug 2018

See all articles by Sharad Asthana

Sharad Asthana

University of Texas-San Antonio

K. K. Raman

The University of Texas at San Antonio

Hongkang Xu

University of Massachusetts Dartmouth

Date Written: March 1, 2015

Abstract

We examine why U.S.-listed foreign companies choose to have a U.S.-based (rather than home country-based) Big N firm as their principal auditor for SEC reporting purposes and the effects of that choice for audit fees and earnings quality. We find that the likelihood of the Big N principal auditor being U.S.-based is decreasing in client size and the level of investor protection in the home country, and increasing in the proportion of income earned outside the home country. We also find compelling evidence that U.S.-based Big N auditors are associated with higher-quality earnings (albeit for a higher fee), despite two factors — the greater distance between the U.S.-based (vis-à-vis home country-based) Big N auditor and the client, and the likelihood that much of the audit work is done outside the U.S. — which potentially could lower the earnings quality of the U.S.-listed foreign client when the Big N principal auditor is U.S.-based. Overall, our study suggests that the higher fees associated with a U.S.-based Big N principal auditor is not just price protection; rather, U.S.-based Big N principal auditors are also improving the financial reporting environment by reporting higher-quality audited earnings for their U.S.-listed foreign clients.

Keywords: U.S.-Listed Foreign Companies, Big N Auditor, Pcaob, Outsourcing, Audit Fees, Quality of Audited Earnings

JEL Classification: L11, L15, M42

Suggested Citation

Asthana, Sharad and Raman, K. K. and Xu, Hongkang, US-Listed Foreign Companies’ Choice of a US-Based Versus Home Country-Based Big N Principal Auditor and the Effect on Audit Fees and Earnings Quality (March 1, 2015). Accounting Horizons, Vol. 29, No. 3, 2015. Available at SSRN: https://ssrn.com/abstract=3209603

Sharad Asthana

University of Texas-San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

HOME PAGE: http://www.sasthana.com

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

Hongkang Xu

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

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