Do Joint Audits Improve Audit Quality? Evidence from Voluntary Joint Audits

European Accounting Review (Impact Factor: 1.15). 12/2012; 21(4):731-765. DOI: 10.1080/09638180.2012.678599


This study examines whether the decision to voluntarily (i.e. without a statutory obligation) employ two audit firms to conduct a joint audit is related to audit quality. We use separate samples and empirical designs for public and privately held companies in Sweden, where a sufficient number of companies have a joint audit on a voluntary basis. Our empirical findings suggest that companies opting to employ joint audits have a higher degree of earnings conservatism, lower abnormal accruals, better credit ratings and lower perceived risk of becoming insolvent within the next year than other firms. These findings are robust to the use of a propensity score matching technique to control for the differences in client characteristics between firms that employ joint audits and those that use single Big 4 auditors (i.e. auditor self-selection). We also find evidence that the choice of a joint audit is associated with substantial increases in the fees paid by the client firm, suggesting a higher perceived level of quality. Collectively, our analyses support the view that voluntary joint audits are positively associated with audit quality in a relatively low litigious setting both for public and private firms.

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    ABSTRACT: Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision, because "Two heads are better than one," and by enhancing auditor independence, because it is more expensive for a company to "bribe" two audit firms than one. Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because joint audits (1) induce a free-riding problem between audit firms, lowering audit evidence precision, and (2) create an opportunity for internal opinion shopping, compromising auditor independence. We further derive a set of empirically testable predictions comparing audit evidence precision, auditor independence, and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.
    Journal of Accounting Research 12/2012; 52(5). DOI:10.2139/ssrn.2111710 · 2.38 Impact Factor
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    ABSTRACT: In its Green Paper on audit policy (October 2010), the European Commission suggested that joint audits might be a way of improving the audit market in Europe. However, some parties consider that joint audits are not an efficient solution because they would significantly increase audit fees paid by companies. We compare audit fees paid in 2007, 2008 and 2009 by listed companies in France, where joint audits are mandatory, with those paid by Italian and British companies. We find significantly higher audit fees in France after controlling for well documented auditor, client and engagement attributes and in particular for auditor switching and non-audit fees, which vary across countries. Theory suggests that audit fees in countries with high investor protection, like the UK, should be greater than those in countries with low investor protection like France and Italy. In our matched samples, audit fees are about 40% higher in France compared to either the UK or Italy. Further, higher audit fees are not paid for higher audit quality, we do not find differential levels of earnings management (a proxy for audit quality).
    European Accounting Review 01/2013; DOI:10.2139/ssrn.2039001 · 1.15 Impact Factor
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    ABSTRACT: The publication of the European Commission Green Paper, ‘Audit Policy: Lessons from the Crisis’ in October 2010, has stirred up a lively debate on the role of joint audits. This literature review identifies and evaluates, for the benefit of future research and regulators, existing evidence about joint audits. We find limited empirical support to suggest that joint audits lead to increased audit quality, but some empirical support to suggest that joint audits lead to additional costs. Overall, this paper indicates that joint audit should be seen as a mechanism that is embedded in a broader institutional context and not be considered in isolation from other factors that might impact the audit market. The results indicate that various country-level characteristics are simultaneously at play. While joint audits can potentially enhance the audit market competition by allowing smaller audit firms to maintain larger market shares, the related impact on audit quality has not yet been clearly demonstrated and thus provides a promising avenue for future research.
    Accounting in Europe 11/2013; 10(2):175-199. DOI:10.1080/17449480.2013.834725
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