Do Foreign Component Auditors Really Harm Audit Quality? A Subsidiary-Level Analysis of Foreign Component Auditor Use

We contribute to the emerging literature on component auditor usage by building a dataset at the level of individual foreign subsidiaries of U.S. multinational audit clients. In contrast to extant research that studies component auditor usage only at the parent level, we measure audit quality at the level of individual foreign subsidiaries and find evidence of a positive association between individual component auditor usage and subsidiary-level audit quality. This result is robust to a variety of different model specifications, matching techniques, and proxies for audit quality. We find mixed evidence that aggregate component auditor usage is associated with audit quality at the parent level. Our results underscore the importance of using disaggregated, subsidiary-level data to study component auditors, and why inferences made from aggregated, parent-level data can be misleading. The results have implications for the PCAOB's current standard-setting agenda