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Market-Based Solutions to Vital Economic Issues
Research
Apr 12, 2019

Auditor Alignment And the Internal Information Environment

Abstract

We investigate how auditor alignment, i.e. parent and subsidiary are audited by auditors from the same audit firm network, affects the quality of the internal information environment of groups and their subsidiaries decision making and performance management processes. We predict that auditor alignment improves internal information quality via better information coordination across the group, and via lower internal information asymmetry between parent and subsidiaries. We use a sample of European groups and find that auditor alignment benefits the subsidiaries’ as well as the groups’ responsiveness to investment opportunities. At subsidiary level, it decreases the loss-making likelihood, and at group level, it facilitates tax planning. We use the staggered introduction of the revised ISA 600, which was incorporated in the applicable audit standards in most countries of our international sample, as exogenous variation in the subsidiary’s auditor alignment likelihood to alleviate endogeneity concerns. We present cross-sectional evidence that groups with high coordination needs and parent-subsidiary pairs with high internal information asymmetry benefit more from auditor alignment. Our contribution is of interest to regulators who consider group audits a priority topic, and to practitioners and academics alike by demonstrating the benefits of an important audit characteristic, auditor alignment, for the internal decision-making and performance management processes of the firm.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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