Seminar – The impact of group dynamics on auditor alignment in corporate groups with public Interest entities (PIEs)

We examine auditor choice for groups consisting of multiple Public Interest Entities (PIEs) in Europe. Corporate group audits (CGAs) are complex and challenging endeavors, as evidenced by the substantial number of audit deficiencies related to CGAs documented by regulators (IFIAR, 2021). Extant CGA research focuses on the use of component auditors, i.e. local auditors assisting in the audit of the consolidated financial statements at the subsidiary level. These component auditors, however, may or may not be statutory subsidiary auditors. This distinction is important because statutory auditors have responsibilities that extend beyond those of component auditors, and the auditor choice will be important to the subsidiary. We focus on auditor alignment (i.e., when the principal auditor and the statutory subsidiary auditor are members of the same global audit firm network) in corporate groups in the European setting of Public Interest Entities (PIEs). Subsidiaries that are PIEs are subject to strict regulation mandating statutory audits and outlining statutory auditor selection procedures at the subsidiary level. Hence, PIE subsidiaries are actively involved in the selection process of their statutory subsidiary auditor. Specifically, we study the role of group dynamics in facilitating alignment and nonalignment. First, we observe that in spite of the subsidiary’s independent statutory auditor selection procedure, the majority of statutory principal auditors are aligned with the statutory subsidiary auditors. On the impact of group dynamics, we find that the degree of subsidiary integration is positively associated with auditor alignment, and subsidiary external visibility is negatively associated with auditor alignment. This suggests that power dynamics within the corporate group are a relevant factor in the alignment of auditors. Additionally, we find no association between group decentralization and auditor alignment, but cross-border frictions negatively predict auditor alignment. Our findings are of interest to investors, regulators, and practitioners concerned with the audit of corporate groups.