The Role of Component Auditor and Principal Auditor in Multinational Group Audits
Student thesis: Doctoral Thesis
Related Research Unit(s)
Multinational corporations (MNCs) having significant operations in countries other than the country of their headquarters. As a result, multinational group audits are required in the course of auditing MNCs. A group audit involves a principal auditor overseeing the work of component auditors carrying out group financial statement audits for MNCs. While PCAOB has expressed concerns about audit quality when the audit involves the use of component auditors, it proposed amendments to the standards to strengthen principal auditors’ supervision of component auditors. However, previous studies show that principal auditor generally has a costly and ineffective monitoring role due to geographic distance and timing differences between the principal auditor and component auditors. Apart from the formal institutions, social trust (an informal monitoring mechanism) may help in resolving such difficult situations. In this study, I examine whether and how societal trust matters in multinational group audits. 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. Using a sample of U.S. firms involving group audits in the period of 2017 – 2020, I 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, I 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. These findings shed light on group audit quality by considering the societal trust of both principal auditors and component auditors. Overall, the results indicate that societal trust, which serves as an effective informal institution, facilitates multinational group auditing services by forming a positive association with audit quality.
- multinational group audits, relative societal trust, audit quality, restatement, discretionary accruals