The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests

Abstract

Using a sample of firms from France, where the law requires the use of two auditors, we study the effect of auditor pair composition on audit quality by examining a specific account, goodwill impairment. We document that firms audited by a Big 4-non-Big 4 auditor pair (BS) are more likely to book an impairment and book a larger impairment than firms audited by a Big 4-Big 4 auditor pair (BB) when low-performance indicators suggest a greater likelihood of impairment. Moreover, firms audited by a BB pair reduce impairment disclosures when they book impairments, while firms audited by a BS pair do not, suggesting lower transparency for firms audited by a BB pair. Our results inform investors and firms in mandatory joint audit regimes, as well as regulators who are considering requiring joint audits.Incidence de la composition du coll ege d'auditeurs sur la qualit e de l'audit conjoint : le cas des tests de d epr eciation R ESUM ELes auteurs etudient l'incidence de la composition du coll ege d'auditeurs sur la qualit e de l'audit conjoint en s'int eressant plus particuli erement aux tests de d epr eciation de l' ecart d'acquisition. L' etude est men ee sur un echantillon de soci et es franc ßaises pour lesquelles la r eglementation impose un audit conjoint.

Do Joint Audits Improve or Impair Audit Quality?

“…Bedard, Piot, and Schatt [2012] show that earnings management seems less aggressive when two Big 4 firms perform the audit than when a Big 4 works in tandem with a non-Big 4. Using a disclosure score for companies composing the French SBF 120 index from 2006 to 2009, Lobo, Paugam, and Casta [2012] provide evidence that the combination of Big 4/non-Big 4 auditors generates higher impairment-related disclosure levels than other combinations, that is, two Big 4 or two non-Big 4. These results are partly consistent with Proposition 5(ii): adding a firm with higher technological efficiency will improve audit quality (i.e., Big 4/non-Big 4 is better than two non-Big 4).…”

The Impact of Audit Quality Indicators on the Timeliness of Goodwill Impairments: Evidence from the German Setting

“…Prior literature has only rarely addressed the influence of audit quality on the timeliness of impairment losses. Lobo et al (2017) examine the impact of auditor pairs in France, where joint audits are mandatory. They find that firms audited by a Big 4-non-Big 4 auditor pair are more likely to recognize goodwill impairments than firms audited by a Big 4-Big 4 auditor pair, when low-performance indicators suggest that goodwill is likely to be impaired.…”

“…Goodwill impairment tests are often the main focus of auditors, due to the generally high risk of material misstatement and the considerable attention from enforcement institutions. Focusing on the timeliness of goodwill impairments might, therefore, enable powerful tests of the monitoring effect that auditors have on ensuring appropriate and reasonable impairment tests (Lobo et al, 2017). An increase in audit quality might increase the timeliness of goodwill impairments, as strong external monitoring mechanisms are expected to reduce information asymmetries and deter management from engaging in opportunistic reporting practices, due to an increased risk of detection and the associated penalties (Jensen and Meckling, 1976;Fama and Jensen, 1983).…”

“…This also represents a different way to investigate the role of auditors in improving financing reporting quality, and therefore complements the accounting literature on audit quality. Prior studies have assessed the impact of joint auditor pairs on impairment recognition in France (Lobo et al, 2017) and audit firm size on the compliance of impairment testing disclosures in Australia (Bepari and Mollik, 2015), as well as audit firm size and auditor industry specialization on the analyst forecast accuracy/ dispersion associated with goodwill impairments (Chen et al, 2015). In contrast, this study explicitly addresses the timeliness of goodwill impairments and focuses on several auditor characteristics, therefore providing a more in-depth analysis of audit quality factors.…”

“…In contrast, this study explicitly addresses the timeliness of goodwill impairments and focuses on several auditor characteristics, therefore providing a more in-depth analysis of audit quality factors. Further, the Lobo et al (2017) study is based on joint audits in France and analyzes the impact of auditor pairs and their tenure. It hence cannot be assumed that findings from a joint audit setting are generalizable to a single audit setting (like in Germany and most other countries).…”