The Use and Characteristics of Component Auditors: Implications from U.S. Form AP Filings
61 Pages Posted: 5 Sep 2018 Last revised: 2 Nov 2019
Date Written: November 2019
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 largely structural, determined by the size and complexity of clients’ foreign 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 misstatement), less timely reporting, and higher audit fees, which collectively suggest that component auditor engagements are associated with adverse outcomes. Further, we find that not all component auditors are created equal and 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. 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: Suggested Citation