The Use and Characteristics of Component Auditors: Implications from U.S. Form AP Filings

53 Pages Posted: 5 Sep 2018 Last revised: 11 May 2019

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: May 9, 2019

Abstract

This paper investigates the common, yet previously opaque, practice of using non-U.S. audit firms (commonly referred to as component auditors) to conduct portions of audit work for U.S. public companies. This investigation is important because 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 answer several questions that could not previously be examined in the U.S. We find that component auditor use is most common amongst large clients with complex international operations. Unexpectedly, 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 restatement), longer audit delay, and higher audit fees. Further, using hand-collected data, we find that not all component auditors are created equal and that only work performed by less competent component auditors and by those facing certain coordination and communication challenges is associated with adverse audit outcomes. However, we find that competent component auditors can alleviate coordination and communication challenges. Overall, these findings suggest that work performed by component auditors is not uniformly detrimental to U.S. audits and that PCAOB Form AP disclosures achieve their objective of increased transparency, as they are useful for assessing the potential for adverse audit outcomes.

Keywords: PCAOB, Form AP, component auditor, group audit, audit quality, audit fees, audit delay

JEL Classification: M42, G18, G28, F00

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi, The Use and Characteristics of Component Auditors: Implications from U.S. Form AP Filings (May 9, 2019). 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)

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