Evidence on the Effects of Network Status and Perspective-Taking on Component Auditors' Decision Quality

Abstract

The use of component auditors in the audit of multinational companies raises important questions about group audit quality. This study examines how the network status of component auditors and a prompt to adopt the group auditor's perspective jointly influence the quality of audit decisions. We hypothesize that a perspective-taking prompt will enhance the decision quality of unaffiliated component auditors, while potentially impairing the decision quality of affiliated auditors. This is based on the expectation that unaffiliated auditors anticipate greater scrutiny from the group auditor and adjust their decision-making strategies accordingly. Our experimental results reveal that in the perspective-taking condition, unaffiliated component auditors deliver greater audit testing effectiveness compared to their affiliated counterparts. Additionally, when affiliated component auditors are prompted to adopt the group auditor's perspective, their audit testing effectiveness declines compared to those who are unprompted. These findings have policy implications, as group auditors often favour affiliated auditors and presume consistent audit quality within the same network. To maintain high group audit quality in multinational audits, countervailing policies and incentives may be helpful when relying on affiliated component auditors. Perspective-taking prompts for unaffiliated component auditors may offer a practical tool for enhancing group audit quality, though their use should be balanced against potential coordination complexities.