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Common auditor, knowledge transfer and audit quality: international evidence

Author

Listed:
  • Siwen Fu
  • Jeong Bon Kim

Abstract

Purpose - Using an international sample of firms affiliated with a business group, this paper aims to investigate the audit quality of common auditors, i.e. auditors shared by multiple firms affiliated with the same business group. Design/methodology/approach - This paper utilizes a large sample of group-affiliated firms from 35 regions. Following the frameworks ofDeFond and Zhang (2014)andFunget al.(2017), this paper measures audit quality using the absolute value of abnormal accruals and modified audit opinions. Ordinary least squares (OLS) regression is used to address the research question. Findings - The findings demonstrate that audit quality improves for firms that share the same auditor with other group members. Importantly, cross-country analyses reveal that this relationship is stronger when auditors operate in countries with stricter local auditor inspection programs and an overall opaque information environment. Additionally, the impact of common auditors on audit quality is more pronounced for group affiliates that have a more opaque firm-level information environment and are monitored by heightened institutional ownership. Practical implications - While affiliates are more likely to select the same audit firms as common auditors, the evidence regarding the effects of common auditors is mixed. The results of this study provide further insights into auditor choices for group-affiliated firms and offer a potential avenue for better protecting shareholders' interests. Originality/value - The results of this study add to the ongoing debates regarding the costs and benefits of common auditor choice for group affiliates. To the best of the authors’ knowledge, this study is the first to demonstrate that the effects of common auditors may vary in different external environments.

Suggested Citation

  • Siwen Fu & Jeong Bon Kim, 2024. "Common auditor, knowledge transfer and audit quality: international evidence," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 39(7), pages 753-778, October.
  • Handle: RePEc:eme:majpps:maj-12-2023-4167
    DOI: 10.1108/MAJ-12-2023-4167
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    More about this item

    Keywords

    Audit quality; Business group; Common auditor; International accounting; F23; G15; G38; M42; N20;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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