Concerted efforts: The role of component auditors in multinational group audit in China

Abstract

Based on the law of comparative advantage, we empirically investigate whether and how component auditors impact audit quality in multinational group audits (MGAs) in China. Despite mixed findings from studies based on U.S. and Australian data, there is a dearth of research on the impact of component auditors in emerging markets, where MGAs are growing substantially, and the institutional environment differs significantly from that of developed countries. Using manually collected data from China, we find that involving component auditors significantly enhances audit quality, with the effect becoming more pronounced as their involvement increases. Our mechanism analysis shows that component auditors enhance MGA audit quality by leveraging their comparative advantages, which are shaped by strong institutional environments and mature capital markets. Furthermore, our heterogeneity analysis reveals that the contribution of component auditors is more pronounced when group auditors have lower proficiency, less experience, or when their accounting firms are less globalized. This study highlights the comparative advantages of component auditors and emphasizes the concerted efforts of both group and component auditors in improving MGA audit quality in an emerging market. Our findings are relevant to multinational groups, international practitioners, investors, and regulators.