The Use and Characteristics of Component Auditors: Implications from U.S. Form AP Filings
53 Pages Posted: 5 Sep 2018 Last revised: 3 Mar 2019
Date Written: March 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. Since the U.S. lead auditor ultimately accepts full responsibility for the resulting audit opinion, 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. 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 greater 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 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: Suggested Citation