Working Paper: Do Use of Foreign Auditor Personnel and Lead Engagement Partner Incentives Affect Audit Quality for U.S. Multinational Companies?

Paper Authors:  Denise H. Downey and Jean C. Bedard

Abstract: While audit opinions for multinational entities are signed by a single national firm, other firms (often in the same global network) participate in gathering and evaluating evidence from client components in other countries. Regulators have recently recognized coordination and monitoring problems with these engagements, and research has begun to assess audit quality impacts. We use data from the PCAOB to investigate whether audit quality (measured as total and reissuance restatements) differs with foreign auditor participation in engagements led by U.S. global network firms, and whether audit partner incentives moderate those associations. Results show that restatements are higher with foreign auditor participation, but this effect is moderated by the client importance, utilization (i.e., billable hours) and tenure of the lead engagement partner. We obtain these results while controlling for office-level client importance, firm tenure, and characteristics distinguishing multinational engagements with more versus less foreign auditor participation.

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