International Audit Quality and Global Audit Firm Networks

This thesis examines the role and ability of global audit firm networks (GAFNs), which are defined as networks that have the capacity to provide integrated audit services by coordinating member firms across countries, to provide international audits of high quality. In Studies 1 and 2, I evaluated GAFN audit quality at the client-level by examining the impact on audit quality and pricing of multiple audit firms participating in the same group audit over the period 2007-2013. In Study 1, I found that multi-firm group audits conducted by auditors from the same GAFN were of higher quality, as indicated by lower proportion of financial statement restatements, compared to group audits conducted by unrelated audit firms. However, audits are costlier when conducted by firms related through membership of a network. In Study 2, I replicated and extended Dee, Lulseged, and Zhang (2015), which utilised the same data source as Study 1, and did not find evidence of lower audit quality in either the replication or extended samples using performance-matched discretionary accruals. Considering consolidated findings of Studies 1 and 2, when the principal auditor and other auditors have common network membership, audit quality issues that can arise when multiple firms work together are potentially moderated but are more expensive. In Study 3, I evaluated GAFN audit quality at the firm-level by using the GAFN member-level disclosures pertaining to defects in firms’ audit quality control procedures. By constructing a firm-level audit quality determinant model, I examined whether GAFN members learned from prior negative inspection outcomes of their member firms around the world. I reviewed 2,474 audit firm inspection reports from 44 countries over the period 2004-2015 and found no evidence of a systematic knowledge transfer between GAFN member firms. This thesis extends the theory of network structure in the global auditing industry and provides evidence that individual GAFN member firms work together across jurisdictions in multinational group audits and coordinate shared quality control systems for consistency within their respective GAFNs. These results are of interest to users of audited group financial reports, audit regulators and international clients with multinational operations