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

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

Abstract: Macroeconomic forces have recently challenged the ability of audit firms to sustain engagement profitability. While principal auditors in multinational audits may use non-US firms to audit client operations, the economic impacts of these choices are unclear. We investigate labor allocation, cost sharing and engagement profitability in Big 6 audits from 2012-2022. Descriptive statistics show increasing allocation of labor to non-US firms over that period, and determinants models identify factors influencing participation of non-US labor. Hypothesis tests show global hours increase and global billing rates decline with extent of non-US labor, especially at high levels of participation. While this implies that principal auditors share cost savings with clients, US firms' engagement realizations rise with increasing substitution of non-US labor, incentivizing more extensive use. Further analysis shows recent reduction in cost sharing, suggesting declining competition. However, we find that audit quality is not reduced by greater substitution of non-US labor. 

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