Working Paper: Does Information on Audit Participants Explain Audit Quality of U.S. Multinational Corporations?

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

Abstract: The Public Company Accounting Oversight Board (PCAOB) recently adopted regulations increasing transparency of audits through disclosure of multiple participating firms and identities of lead engagement partners (LEPs). We use PCAOB data on U.S. global network firm multinational engagements prior to these disclosures to investigate audit quality, effort and pricing differences associated with foreign auditor participation and LEP portfolio characteristics. For foreign auditors, results show lower audit quality across multiple proxies; greater engagement hours imply this is not due to lower effort. Of LEP characteristics, client importance to the partner or office has the greatest impact, while some tests support improved audit quality around partner transitions. However, supplemental analysis shows LEP characteristics impact restatements only for domestically staffed engagements; restatements remain high across foreign auditor engagements. We contribute to the literature by studying audit quality effects of audit participants, prior to changes in firm or individual behavior following Form AP disclosures.

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