Working Paper: Auditors' National Office Consultations

Paper Author: Matthew Sherwood, Miguel Minutti-Meza, and Ally Zimmerman

Abstract:  We study national office consultations (NOCs) using a mixed-methods approach. Our review of large audit firms’ NOC methodologies covers detailed internal guidelines, including a list of required consultation topics, and finds that NOCs can be classified as mandatory, voluntary, formal, or informal. Our structured interviews reveal that audit engagement leaders perceive NOCs as part of quality control, a source of domain-specific expertise, and a means of securing their firm’s backing. Most public company engagements will have at least one NOC, but an NOC is not always required. However, the NOC process is increasingly perceived as formulaic due to regulatory oversight, and sometimes as a frustrating compliance exercise that limits partners' and engagement teams’ professional judgment. Analyzing PCAOB inspection data, we find that 73 percent of inspected engagements have formal NOCs and that engagement characteristics can predict consultations and variation in national office hours. Additional analyses reveal that engagements with more extensive NOCs are less likely to receive a Part I inspection finding. Overall, audit firms rely extensively on NOCs, but this practice faces limitations as a monitoring mechanism.


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