Exploring the Extent and Determinants of Knowledge Sharing in Audit Engagements

Abstract

Audit firms are faced with increasing demands for audit efficiency and effectiveness. Increasing knowledge sharing in audit engagements can help them respond to this challenge, and this study seeks to advance understanding of the extent and determinants of such sharing. Data collected from auditors of two Big Four audit firms suggest that both firms have high, but far from complete, levels of knowledge sharing. The factors identified as affecting such sharing range from characteristics of the client to attributes of the audit firm, audit team and individual auditors. A framework is proposed for organizing these factors and relationships. JEL Classification: M42

Auditors’ Joint Engagements and Audit Quality: Evidence from Italian Private Companies

“…Relatedly, Bedard, Biggs, and Maroney () examine group dynamics and knowledge sharing and find that group interactions can improve performance when group members pool their knowledge, while if one member dominates the group, the interactions can result in a process loss. Chow, Ho, and Vera‐Munoz () find that auditors, when surveyed, answered that lack of coordination and communication among team members and the distraction of dividing time and attention among multiple audits were among the impediments to knowledge sharing. Causholli, Floyd, Jenkins, and Soltis () find that auditors seek knowledge within the same audit office from their friends, their immediate coworkers, and those with whom they have worked on an audit team during the last year.…”

“…However, the benefits of connectedness may be undermined by less‐than‐optimal collaboration and insufficient information exchange between the auditors involved in the audit due to lack of communication (Chow et al. ). Relatedly, knowledge transfer among individuals might be difficult because expertise is an individual attribute (Chin and Chi ) and because individual auditors are often required to apply their own judgment in identifying and implementing pieces of information during an audit assignment (Vera‐Muñoz et al.…”

Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?

“…Separately, Chow et al. () argue that knowledge sharing and interaction among audit professionals has emerged in recent years as an important source of audit effectiveness and efficiency . To the extent that opportunities for formal education, interaction, and knowledge sharing at the firm level increased following the PW/CL merger, the audit quality of the merged firm PwC is expected to be higher .…”

“…At the firm level, a larger auditor may possess “deeper pockets” or have larger aggregate quasi‐rents, and thus may be more incentivized to provide a higher‐quality audit to avoid litigation exposure or the threat of reputation loss (DeAngelo ,b). Further, at both the firm and/or local engagement office levels, a larger auditor may (i) be more independent because of reduced economic dependence on any one individual client (Chan and Wu ; Reynolds and Francis ), (ii) be more competent because of enhanced communication and knowledge‐sharing activities (Francis and Yu ; Vera‐Muñoz, Ho, and Chow ), and (iii) find it easier to develop industry expertise through diverse industry‐specific experience with more clients and the development of standardized industry‐tailored audit methods (Balsam, Krishnan, and Yang ; Chow, Ho, and Vera‐Muñoz ; Francis, Reichelt, and Wang ; Francis and Yu ; Reichelt and Wang ). All of these factors may contribute to the increase in the audit quality of the merged firm.…”

“… Chow et al. () attribute the greater importance of knowledge sharing in recent years to the fact that (i) the audit firms have adopted a more “top down” methodology, (ii) individual auditors are involved in only a small part of the audit process, and (iii) audit procedures now focus more on softer information in collecting necessary audit evidence. …”