Inexperienced participating auditors and the internal information asymmetry of multinational corporations

42 Pages Posted: 9 Sep 2018 Last revised: 9 Jun 2020

See all articles by Tom Adams

Tom Adams

La Salle University

Ying Zhou

University of Connecticut - Department of Accounting

Date Written: January 14, 2020

Abstract

Many U.S. corporations operate internationally. For instance, S&P 500 firms generate approximately 29 percent of their sales in foreign markets (Brzenk 2018). Multinational corporations (MNCs) rely on information about their operations to allocate resources. This information is dispersed within the firm, which could lead to internal information asymmetry (IIA) between executives and divisional managers. Meanwhile, audits of MNCs are challenging and parts of these audits are sometimes outsourced to local foreign auditors who have no experience serving as opinion-issuing auditors for U.S. issuers. We examine whether involving such auditors affects MNCs’ internal information environments. We find that, relative to a matched control sample, SEC issuers employing inexperienced auditors have higher IIA and lower internal capital allocation efficiency. Together, the associations we document extend prior literature by providing some evidence that audit quality matters not only to a firm’s external financial statement users but also its internal users.

Keywords: Group Audits, Internal Information Asymmetry, Internal Capital Allocation Efficiency

JEL Classification: G31, M42

Suggested Citation

Adams, Thomas and Zhou, Ying, Inexperienced participating auditors and the internal information asymmetry of multinational corporations (January 14, 2020). University of Connecticut School of Business Research Paper No. 18-30, Available at SSRN: https://ssrn.com/abstract=3240002 or http://dx.doi.org/10.2139/ssrn.3240002

Thomas Adams (Contact Author)

La Salle University ( email )

United States
2159511081 (Phone)

Ying Zhou

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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