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The use and characteristics of component auditors: Implications from U.S. Form AP filings
|Title:||The use and characteristics of component auditors: Implications from U.S. Form AP filings|
show 2 moreAudit fees
|Date Issued:||28 Aug 2018|
|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. 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 find that this practice 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 (i.e., material weakness disclosures and restatements), longer audit delay, and higher audit fees. Interestingly, we find that not all component auditors are created equal, and that work performed by component auditors that are less competent (based on number of CPAs employed and experience leading U.S. audits and in the client’s industry) and facing greater coordination and communication challenges (based on the country’s rule of law, English language proficiency, and time zone differences from the lead auditor) drive 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.|
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