The Use and Characteristics of Component Auditors: Implications from U.S. Form AP Filings
55 Pages Posted: 5 Sep 2018 Last revised: 1 Dec 2018
Date Written: November 29, 2018
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. Consistent with regulator concern, we find that the percentage of audit hours conducted by component auditors is associated with lower audit quality, longer audit delay, and higher audit fees. Interestingly, using hand-collected data, we find that not all component auditors are created equal and that work performed by component auditors that are less competent and facing greater coordination and communication challenges drives the association with adverse audit outcomes. Overall, these findings suggest that the use of component auditors is not uniformly detrimental and that Form AP disclosures can help interested parties better assess 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