SUMMARY
Inadequate supervision by lead auditors of “other” (component) auditors contributing to audit engagements has been a recent regulatory concern. However, uniquely in the United States, the lead auditor is required to conduct only minimal supervision of the other auditor and refer to the other auditor in its audit report, when it divides responsibility with the latter. Our sample of “referred-to” (RT) firm-years is divided, about equally, between audits of consolidated subsidiaries and equity-method investees. We document two findings. First, supervision challenges drive the use of RT auditors for consolidated subsidiaries while the component’s materiality drives the use of RT auditors in both settings. Second, there is some evidence that RT auditors in both settings are associated with lower audit quality and efficiency compared with control samples, and this negative effect is stronger for consolidated subsidiaries. Our research is relevant to the Public Company Accounting Oversight Board’s proposed changes in auditing standards for other auditors.
