Do Joint Audits Improve or Impair Audit Quality?

Abstract

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision, because “Two heads are better than one,” and by enhancing auditor independence, because it is more expensive for a company to “bribe” two audit firms than one. Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because, in that situation, joint audits (1) induce a free-riding problem between audit firms, lowering audit evidence precision, and (2) create an opportunity for internal opinion shopping, compromising auditor independence. We further derive a set of empirically testable predictions comparing audit evidence precision, auditor independence, and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.