What Are the Determinants and Consequences of Auditor’s Use of In-House Specialists?
67 Pages Posted: 14 Oct 2020
Date Written: July 2020
Using proprietary Public Company Accounting Oversight Board data, we examine the determinants and consequences of auditors’ use of in-house specialists (i.e., employed by the auditor). The use of in-house specialists among the six largest global network U.S. audit firms reached an average of about 90% of inspected audits in 2017-2018. First, we document that client size, complexity of accounting estimates, fair value measurements, and the audit team’s experience are associated with the use of specialists. Second, involving specialists is associated with higher team hours and fees but lower engagement profitability, suggesting that specialists are costly. Third, there is a debate on the use of specialists and audit quality. Specialists bring unique expertise in complex areas, but academics and regulators argue that auditors may not always supervise specialist work properly. Our results support the latter argument; quality problems are more prevalent when there is comparatively more specialist involvement. However, increased coordination with specialists, as well as the audit team’s experience, mitigate audit quality problems.
Keywords: specialists, audits, PCAOB, audit quality, audit costs, experts
JEL Classification: M41, M42
Suggested Citation: Suggested Citation