Does It Matter Where Other Audit Participants are Disclosed:

• In Event: Current Issues

Abstract

In 2015 the PCAOB finalized the rule requiring auditors to disclose other audit participants in a new PCAOB form, Form AP, rather than in the audit report as it was originally proposed. The PCAOB and proponents of such decision argue that disclosure in the PCAOB Form AP and the auditor report should serve the same purpose while other commenters and investors criticize this approach. In this study we try to provide some insight on this debate by investigating whether the existing disclosure of other audit participants in the PCAOB Form 2 or the audit report affects audit fees and audit delays differently.
Using a sample of U.S. listed public companies from 2009 to 2013, we find that principal auditors identified in the PCAOB Form 2 as using the work of other auditors (“Form 2 group”) charge higher audit fees and have shorter audit delays than those identified in the audit report (“Audit Report group”). Separately comparing either group to a control group without any such disclosure, we find that auditors of the “Form 2 group” charge fee premiums and do not incur longer audit delays but auditors in the “Audit Report group” charge lower fees and incur longer audit delays. We also find that the fee premiums charged by auditors with the Form 2 disclosure are driven by auditors of domestic companies (where litigation risks are arguably higher) while the fee discounts given by auditors with the audit report disclosure are driven by auditors of foreign companies. Audit delays are also mainly driven by auditors of foreign companies.
Our results suggest that where to disclose other auditors’ participation seems matter. We rule out other possible explanations and attribute our results to the underlying litigation risks associated with these two types of disclosures, because principal auditors do not assume responsibility for the work of other auditors if other auditors’ participation is disclosed in the audit report but they take responsibility for cases identified through the PCAOB Form 2 disclosure. Our study should have some implications for the PCAOB, investors, and auditors.

Author

• Juan Mao, University of Texas at San Antonio