Does the adoption of artificial intelligence by audit firms and their clients affect audit quality and efficiency? Evidence from China

Abstract

Purpose This study aims to examine whether the adoption of artificial intelligence (AI) by audit firms and their clients affects audit efficiency and audit quality. Design/methodology/approach This study empirically examines the abovementioned research question based on data from China for the years 2011 to 2020. It uses audit report lag as a proxy for audit efficiency and the likelihood of annual report restatement as a proxy for audit quality. It adopts the propensity score matching and the two-stage OLS regression model to address the endogeneity issue led by firms’ innate complicated functions. Findings The findings show that when audit firms and their clients use AI separately, there's a positive link between AI use and audit report lag. However, when audit firms and clients use AI together, there's a negative link between AI use and audit report delays that enhance overall audit efficiency. Next, the authors observe a negative link between AI use and the likelihood of a restatement. Finally, the authors find that the association between AI adoption and audit quality is driven by increased audit effort lag. Results are consistent and robust to endogeneity tests and sensitivity analyses. Originality/value Findings can complement the audit quality and corporate governance literature by clarifying that external audit must evolve through digitalization and the incorporation of newly developed digital tools, such as AI.