Auditor Leadership in Joint Audit and Audit Quality

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 2: Joint Audits and Market Structure

Abstract

We investigate the effect of leadership among joint auditor pairs, measured with the percentage of audit fees received by auditors, on audit quality. Using a sample from France, where the law requires the use of two auditors, we show that auditor leadership is associated with higher audit quality. We document that firms that are audited by joint auditor pairs in which one auditor acts as a leader, i.e., receives most of audit fees, exhibit lower discretionary accruals, lower income-increasing discretionary accruals and report more conservatively using the Basu’s (1997) measure of conditional conservatism. Our findings hold using other measures of financial reporting quality such as discretionary revenues (Stubben 2010). We also provide evidence that auditor pairs with a leading auditor do not generate higher total audit costs for the client. Our results are consistent with lower coordination costs and a reduced probability of opinion shopping for clients for which joint auditor pairs have a leading auditor. Our study informs investors and firms in mandatory and voluntary joint audit regimes, as well as regulators who are considering requiring joint audit to enhance audit quality and decrease audit market concentration.

Authors

• Andrei Filip, Essec Business School

• Gerald Lobo, University of Houston

• Thomas Jeanjean, Essec Business School

• Luc J. Paugam, Essec Business School