Joint Meeting of the Mid-Atlantic and Northeast Regions

Audit Firms’ Network Structure and Audit Quality

• In Event: Audit and Partner Quality

Abstract

Audit offices function as semi-autonomous units within their audit firm network and individual partners have much autonomy in the course of their engagements. Therefore, maintaining a uniform level of quality across engagements is difficult to achieve for audit firms. We hypothesize that differences in audit quality between audit offices and partners from the same audit firm increase with the complexity of an audit firm’s network structure. The network structure of an audit firm increases in complexity with the number of local offices, number of individual audit partners, and their spatial distribution (i.e., the geographic dispersion of its offices and partners). To test this, we examine auditors’ going-concern reporting decisions for a sample of 23,086 firm-year observations from 25 European countries for the period 2011-2019. Consistent with prior research using data from the US, we find evidence consistent with larger audit offices providing higher quality audits (i.e., there is a positive association between audit office size and the likelihood of going-concern opinions). However, our data do not provide evidence that that this office size effect increases as a function of the complexity of audit firm’s network structure.

Authors

• Maysam Ayoub, University of Antwerp

• Kris Hardies, Universiteit Antwerpen