Working Paper: The Influence of Foreign Auditors and Lead Engagement Partners on Quality of Audits of 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 firm, other firms (often in the same global network) participate in gathering and evaluating evidence from components of the entity located in other nations. Regulators have recently recognized coordination and communication problems with these engagements, and research has begun to assess possible audit quality impacts. We use data from the Public Company Accounting Oversight Board's (PCAOB) Annual Data Request to investigate whether audit quality differs based on the extent of foreign auditor participation in engagements of U.S. multinational issuers, led by U.S. global network firms. Results show that audit hours increase and billing rates decrease with greater foreign auditor participation. Investigating audit quality, we also find that misstated financial reports are more likely with foreign auditor participation. However, further analysis shows that the effects of foreign auditor participation are contingent on several characteristics of the U.S. lead engagement partner (i.e., tenure, busyness, and importance of the client). For example, when foreign auditor participation is high, the rate of misstatements is highest when engagement partners have relatively low billable hours or the client is highly important to the partner's revenues.

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