Audit Quality of the Integrated Supply Chain – Evidence from Taiwan Electronic Industry

Abstract

Many suppliers and their major customers share a common audit firm or even common auditors in endorsing financial statements (i.e., supply chain audit). Yet, accompanying with the benefits stemmed from enhanced information corroboration and expertise spillover, supply chain audit faces the challenge of potential information collusion and fee dependence. We find supply chain audit alone is not associated with high audit quality. However, supply chain audit, coupled with firm-level industry expertise, results in low discretionary accruals and weakly reduction in restatement probability. Further, sharing a common audit at firm, lead auditor, or concurring auditor-level might have differential implications for audit quality. We find sharing either a staggered common lead or concurring auditor decreases the likelihood of restatement; in contrast, sharing them simultaneously increases it. Moreover, our analyses suggest supply chain audit contributes more to audit quality for up than for middle and down stream firms. Our study is motivated by recent audit failures divulged along the supply chain, and the Public Company Accounting Oversight Board’s (PCAOB) initiatives on mandatory audit firm rotation and engagement partner’s signature.