Earnings Informativeness of Multi-Firm Group Audits

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Abstract

The revised U.S. group audit standard, AU-C Section 600, increases the responsibility of the group auditor and elucidates the role of any participating component auditors involved. Using the implementation of AU-C Section 600 effective for periods ending on or after December 15, 2012 as an exogenous shock, we examine whether the market perceives clients’ earnings differently under the clarified versus previous group audit standard. We find that earnings informativeness of group audited financial statements increases for multi-firm auditees ex-post the new regulation. These results indicate that the market cares about how multiple audit firms work together on various components of the same audit and values improvements to the group audit standard clarifying the audit process and role of each auditor involved. This finding is robust to the supplementary analysis of earnings conservatism. Overall, the market considers the change in regulation relevant to assessing earnings quality and supports the regulatory improvements to the group audit standard.

Authors

• Johannes Impink, University of Florida

• Alexey Lyubimov, Concordia University

• Ashna Prasad, Monash University