Component Auditor Use and Lenders’ Perception of Audit Quality

Abstract

SUMMARY While component auditors audit a significant proportion of public companies, lenders may not be aware of their involvement before Form AP disclosure. We study whether the disclosure of component auditor use and the extent of their involvement is useful to lenders. We find that the loan spread is higher when firms’ lead auditors use component auditors relative to engagements without component auditor participation. Further, for firms whose lead auditors use component auditors, we find a positive association between the extent of such participation and the loan spread. However, the positive effect of component auditor use on the loan spread is mitigated for firms with a high level of foreign operations, consistent with the notion that the use of component auditors is more beneficial for firms with significant foreign operations. Overall, our findings suggest that the disclosure of information on component auditor participation in global group audits is useful to lenders. Data Availability: All data used in this paper are publicly available. JEL Classifications: M42; G32.

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