Working Paper: The Economics of Multinational Group Audits: Evidence from PCAOB Data  

Paper Authors: Denise H. Downey, Andrew Kitto and Jean C. Bedard

Abstract: Multinational corporations are often audited by groups of firms, including a lead firm that signs the opinion and component auditors (CAs) who participate in other countries. Prior research generally finds lower audit quality and higher fees for engagements using CAs. We use proprietary data from the PCAOB to investigate production and profitability elements of fees for audits of U.S.-based corporations led by U.S. affiliates of global audit networks. We find global engagement hours increase with CA use and extent of use, suggesting CA inefficiency. Although global audit fees also increase with CA use, fees per hour decline, consistent with lower wages for non-U.S. auditors. In contrast, U.S. lead firms' realization rates increase with CA use. While lead firms gain from substituting non-U.S. for domestic labor, our results also show declining audit quality as CA use increases. Thus, clients and financial statement users do not benefit in the long term. 

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