Are Audit Disclosures Informative about Foreign Earnings?

Part of the Lubar Research Seminar Series

Speaker:  Jenna J. Burke, University of Colorado – Denver

We examine whether audit disclosures regarding changes in foreign component auditor use are informative about the persistence of foreign earnings. Component auditor use is required to increase when, amongst other factors, the financial significance of a specific location increases. Therefore, changes in component auditor use could reveal information about the materiality and sustainability of foreign operations. Consistent with this, we find changes in component auditor use are associated with foreign earnings persistence, even after controlling for other foreign information sources such as geographic segments, foreign sales, and subsidiaries. We also find a significant market reaction to changes in the use of large component auditors, which suggests an unintended benefit of Form AP in line with the PCAOB’s objective to provide information.