Does Relative Societal Trust Influence Audit Quality? Evidence from Multinational Group Audits

We examine whether and how societal trust matters in the multinational group audit setting. Societal trust refers to a willingness to trust and an associated party’s trustworthiness. A higher level of societal trust among auditors in the group audit is expected to restrain component auditors’ opportunistic acts, improve information environment, and enhance communications between principal auditor and component auditors, resulting in a higher group audit quality. In line with this argument, we hypothesize and find that the societal trust of component auditors’ countries of location is negatively associated with both financial restatements and signed discretionary accruals. In relative term, we find that when the principal auditor is more (less) willing to trust its component auditors, the positive effect of the component auditors’ trust on group audit quality retains (loses) its significance. Our results indicate that societal trust facilitates group audit quality.