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The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures

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  • Jenna J. Burke
  • Rani Hoitash
  • Udi Hoitash

Abstract

This paper investigates the common, yet previously opaque, practice of using foreign audit firms (component auditors) to conduct portions of audit work for U.S. public companies. U.S. 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 component auditor use is largely structural, determined by the size and complexity of clients' multinational operations. We do not find that the mere use of component auditors is detrimental to audit outcomes, but rather the amount of work conducted by component auditors is associated with lower audit quality (i.e., higher likelihood of misstatement), higher likelihood of nontimely reporting, and higher audit fees, which collectively suggest that component auditor engagements are associated with adverse outcomes. Furthermore, we find that only the work performed by less competent component auditors and those facing geographic and cultural/language barriers, including significant geographic and cultural distance, weak rule of law, and low English language proficiency, is associated with adverse audit outcomes. Overall, these findings provide initial archival evidence that the use of certain component auditors on U.S. multinational audits is associated with audit coordination issues, which suggests that PCAOB Form AP disclosures provide relevant information. Utilisation et caractéristiques des auditeurs de composantes étrangers dans le cadre des audits de multinationales des États‐Unis : Perspectives issues des déclarations dans le formulaire AP Cette étude examine la pratique courante, bien qu'opaque jusqu'ici, du recours à des cabinets d'audit étrangers (auditeurs de composantes) pour effectuer une partie du travail d'audit pour les sociétés ouvertes des États‐Unis. Des législateurs américains ont fait part de leur préoccupation quant à la transparence et à la qualité des audits pour lesquels les services d'auditeurs de composantes ont été retenus. À l'aide des données du formulaire AP du PCAOB qui a récemment été rendu obligatoire, nous observons que le recours aux auditeurs de composantes est en grande partie structurel et qu'il est déterminé par l'ampleur et la complexité des activités multinationales des entreprises clientes. Nous avons constaté que si le fait de recourir à des auditeurs de composantes n'a pas en soi un effet négatif sur le résultat des audits, la quantité de travail réalisé par les auditeurs de composantes est associée à une plus faible qualité des audits (c.‐à‐d. une probabilité plus élevée d'inexactitude), à une probabilité accrue de non‐respect des délais pour la communication d'information et à des frais d'audit plus élevés, des conséquences qui, ensemble, donnent à penser que l'embauche d'auditeurs de composantes est associée à des résultats négatifs. En outre, nous observons que seul le travail d'audit réalisé par des auditeurs de composantes moins compétents, par ceux qui doivent composer avec des obstacles géographiques et culturels/linguistiques, y compris la distance géographique et la différence culturelle, un faible état de droit et une piètre maîtrise de l'anglais, est associé à des résultats d'audit négatifs. Dans l'ensemble, ces observations fournissent des preuves documentaires initiales indiquant que le recours à certains auditeurs de composantes lors d'audits de multinationales des États‐Unis est associé à des problèmes de coordination des audits, ce qui porte à croire que l'information communiquée dans le formulaire AP du PCAOB est pertinente.

Suggested Citation

  • Jenna J. Burke & Rani Hoitash & Udi Hoitash, 2020. "The Use and Characteristics of Foreign Component Auditors in U.S. Multinational Audits: Insights from Form AP Disclosures," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2398-2437, December.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:4:p:2398-2437
    DOI: 10.1111/1911-3846.12605
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    3. Paul J. Coram & Noel Harding & David C. Hay & Jahanzeb Khan & Ashna Prasad, 2021. "Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 600 (ED 600)," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5879-5890, December.
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    5. Bingyi Chen & Jenelle K. Conaway, 2022. "Do U.S. Investors Value Foreign Component Auditors?," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 805-851, June.
    6. Song, Jie & Liang, Shangkun & Zhen, Yuhan, 2023. "Does CEO-auditor dialect sharing affect stock price crash risk? Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    7. Marcus M. Doxey & James G. Lawson & Thomas J. Lopez & Quinn T. Swanquist, 2021. "Do Investors Care Who Did the Audit? Evidence from Form AP," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1741-1782, December.

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