Common auditor, knowledge transfer and audit quality: international evidence
ISSN: 0268-6902
Article publication date: 16 October 2024
Issue publication date: 18 November 2024
Abstract
Purpose
Using an international sample of firms affiliated with a business group, this paper aims to investigate the audit quality of common auditors, i.e. auditors shared by multiple firms affiliated with the same business group.
Design/methodology/approach
This paper utilizes a large sample of group-affiliated firms from 35 regions. Following the frameworks of DeFond and Zhang (2014) and Fung et al. (2017), this paper measures audit quality using the absolute value of abnormal accruals and modified audit opinions. Ordinary least squares (OLS) regression is used to address the research question.
Findings
The findings demonstrate that audit quality improves for firms that share the same auditor with other group members. Importantly, cross-country analyses reveal that this relationship is stronger when auditors operate in countries with stricter local auditor inspection programs and an overall opaque information environment. Additionally, the impact of common auditors on audit quality is more pronounced for group affiliates that have a more opaque firm-level information environment and are monitored by heightened institutional ownership.
Practical implications
While affiliates are more likely to select the same audit firms as common auditors, the evidence regarding the effects of common auditors is mixed. The results of this study provide further insights into auditor choices for group-affiliated firms and offer a potential avenue for better protecting shareholders' interests.
Originality/value
The results of this study add to the ongoing debates regarding the costs and benefits of common auditor choice for group affiliates. To the best of the authors’ knowledge, this study is the first to demonstrate that the effects of common auditors may vary in different external environments.
Keywords
Acknowledgements
The authors thank Jie Zhou (editor), Joseph Zhang (associate editor), and acknowledge the helpful comments from the two reviewers. Authors also thank Prof. Cheong H. Yi for sharing the historical Osiris data. Other data sources that support the findings of this study are available in a public repository. Authors appreciate the helpful comments and suggestions from Neil Fargher, Liu Zheng, Wen Chen, Weiyin (Vivian) Zhang, Jialin Yu, and seminar participants at the 2019 AFAANZ Conference and the 2023 Managerial Auditing Journal Conference. All errors are their own.
Citation
Fu, S. and Kim, J.B. (2024), "Common auditor, knowledge transfer and audit quality: international evidence", Managerial Auditing Journal, Vol. 39 No. 7, pp. 753-778. https://doi.org/10.1108/MAJ-12-2023-4167
Publisher
:Emerald Publishing Limited
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