Assessing France's joint audit requirement: are two heads better than one?

We examine auditor choice for listed companies in France where two (joint) auditors are required by law. The joint audit requirement creates a unique setting to study if a firm’s ownership structure affects its auditor-pair choice as well the consequences on earning quality. The results support predictions from agency theory that higher quality (Big 4) auditors are more likely to be used as external monitors when there is greater separation of ownership and control and increased information asymmetry between the firm and outsiders. A Big 4 auditor (paired with a non-Big 4 auditor) is more likely to be used for firms with more diversified ownership structures and less family blockholdings, and these associations are even stronger for firms with two Big 4 auditors conducting the joint audit. We also test if a firm’s auditor-pair choice affects earnings quality and find that firms using one Big 4 auditor (paired with a non-Big 4 auditor) have smaller income-increasing abnormal accruals compared to firms that use no Big 4 auditors, and once again this effect is even stronger for firms that use two Big 4 auditors. While French firms do have more concentrated ownership structures than Anglo-America firms, we conclude that cross-sectional differences in ownership structures create economic incentives that affect auditor-pair choices under France’s joint auditor requirement, and that earnings are of high quality when audited by Big 4 auditors. Finally, we report evidence that French audit fees are no higher under a joint audit approach compared to other European countries. While we do not know if the joint audit approach necessarily produces a better quality audit than the single- auditor approach used in most countries, we do find that French firms are valued more highly than neighboring firms in Belgium, which has a similar legal and regulatory system, and this finding suggests investors may perceive two heads (auditors) are better than one in reducing information uncertainty with respect to reported earnings.