What Are the Determinants and Consequences of Auditor’s Use of In-House Specialists?

Abstract

We investigate auditors’ use of in-house specialists (employed by auditors) and examine data from PCAOB inspections of global network audit firms from 2006 to 2018, a period in which the use of specialists in audits increased from 50 to 90 percent. We provide descriptive evidence that using specialists is predictably associated with client and audit team characteristics. Next, we find that when specialists are used in audits that involve complex accounting estimates, specialist use is associated with procedural audit quality issues identified by PCAOB inspections. Finally, the use of specialists is associated with increases in audit fees and reductions in engagement profitability, suggesting that involving specialists is costly. Specialists bring expertise to complex issues, but our findings suggest that auditors’ use of specialists does not entirely mitigate financial reporting and audit quality problems linked to companies’ use of complex accounting estimates and fair value measurements.