The Use and Characteristics of Component Auditors: Implications for U.S. Audits

• In Event: Archival Studies of Auditor Behavior

Abstract

This paper investigates the common, yet previously opaque, practice of using non-U.S. audit firms (commonly referred to as component auditors) to conduct portions of audit work for U.S. public companies. Since the U.S. lead auditor ultimately accepts full responsibility for the resulting audit opinion, 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 this practice is most common amongst large clients with complex international operations. Consistent with regulators’ concern, we find that the percentage of audit hours conducted by component auditors is associated with lower audit quality (i.e., material weakness disclosures and restatements), longer audit delay, and higher audit fees, but that not all component auditors are created equal. Specifically, work performed by component auditors that are more competent, operating in countries with strong rule of law, and in countries with greater English language proficiency is not associated with adverse audit outcomes. Overall, these findings suggest that the use of component auditors is not uniformly detrimental to the resulting audit and that Form AP disclosures can help interested parties better assess the potential for adverse audit outcomes.

Authors

• Jenna Burke, University of Colorado Denver

• Rani Hoitash, Bentley University

• Udi Hoitash, Northeastern University