Client Management’s Perceptions of Audit Offshoring and the Related Audit Quality Tradeoff

• In Event: Audit Quality

Abstract

Although Big Four accounting firms in the U.S. and the U.K. have begun offshoring audit work, there is limited research on this expanding practice. We use a combination of survey, interview and experimental methods to examine audit client management’s 1) perceptions of, and reactions to, audit offshoring, 2) beliefs regarding the effect of offshoring on audit quality, and 3) willingness to trade off audit quality for lower audit fees. Our survey and interview results indicate that most audit client managers are unaware of the practice of offshoring. When informed of it, they are concerned that it would negatively affect audit quality, data security, and their ability to communicate with overseas audit staff. Clients also believe that audit firms should disclose their offshoring practices and support regulatory intervention to require such disclosure. Our experimental results show that, although clients believe that offshoring will lower audit quality, they are willing to trade off quality for a reduction in audit fees. In addition, we find that clients who are more familiar with offshoring are less concerned about the practice overall, suggesting that increased transparency may help ease clients’ concerns. Our findings have implications for audit firms, clients and regulators. Audit firms could use our results to better anticipate clients’ reactions to offshoring and to reassess their disclosure policies. Clients could use our findings as a basis for discussions with their auditors regarding their use of offshoring and its potential impact on the audit process. Finally, regulators should find our results useful in their deliberations regarding the need to regulate audit offshoring and related disclosures.

Authors

• Eric W Chan, University of Pittsburgh

• Donald V Moser, University of Pittsburgh