The use and characteristics of foreign component auditors in U.S. multinational audits: Insights from Form AP disclosures

59 Pages Posted: 5 Sep 2018 Last revised: 26 Mar 2020

See all articles by Jenna Burke

Jenna Burke

University of Colorado at Denver

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: March 1, 2020

Abstract

This paper investigates the common, yet previously opaque, practice of using foreign audit firms (component auditors) to conduct portions of audit work for U.S. public companies. U.S. regulators have expressed concern for the transparency and quality of audits using component auditors. Employing data disclosed in the newly-mandated PCAOB Form AP, we find that component auditor use is largely structural, determined by the size and complexity of clients’ multinational operations. We do not find the mere use of component auditors is detrimental to audit outcomes, rather, the amount of work conducted by component auditors is associated with lower audit quality (i.e., higher likelihood of misstatement), higher likelihood of non-timely reporting, and higher audit fees, which collectively suggest that component auditor engagements are associated with adverse outcomes. Further, we find that only work performed by less competent component auditors and those facing geographic and cultural/language barriers, including significant geographic and cultural distance, weak rule of law, and low English language proficiency, are associated with adverse audit outcomes. Overall, these findings provide initial archival evidence that the use of certain component auditors on U.S. multinational audits is associated with audit coordination issues, which suggests that PCAOB Form AP disclosures provide relevant information.

Keywords: PCAOB, Form AP, component auditor, group audit, audit quality, audit fees, report timeliness, geographic barriers, cultural barriers

JEL Classification: M42, G18, G28, F00

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi, The use and characteristics of foreign component auditors in U.S. multinational audits: Insights from Form AP disclosures (March 1, 2020). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3240212 or http://dx.doi.org/10.2139/ssrn.3240212

Jenna Burke (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
207
Abstract Views
1,753
rank
154,341
PlumX Metrics