Alternative agency relationships for offshore audits and audit quality: Evidence from U.S.‐ listed foreign companies

Abstract

Auditors of multinational companies often engage other auditors to conduct a significant part of their audit work for their foreign clients. Using a sample of U.S.-listed Chinese companies, we examine the audit quality for firms audited by U.S. auditors under alternative agency relationships with other auditors in China. We find higher quality audits for companies audited by U.S. auditors with affiliates (member firms of global audit networks or auditors with China offices) than U.S. auditors without affiliates in China. We also find U.S. auditors that have offices in China provide higher quality audits than those that are member firms of global audit networks, but there is no significant difference between the use of U.S. and Chinese member firms as signing auditors. Our findings offer useful implications for financial statement users, audit firms and regulators regarding the quality of audits involving other auditors under alternative agency relationships.