How Does Disclosure of Component Auditor Use Affect Nonprofessional Investors' Perceptions and Behavior?

Abstract

SUMMARY Drawing on prior research and source credibility theory, this study examines nonprofessional investors' acquisition and evaluation of component auditor use as disclosed in Form AP, and whether and how this evaluation influences their investment decisions. I find that very few investors voluntarily access component auditor information. When asked to review the Form AP, investors perceive the audit team as more trustworthy when a component auditor is not used, leading them to perceive the audited financial statements as more reliable. However, the perceived competence of the audit team and investment behavior are not affected by component auditor use. Regulators express concerns regarding component auditor use, but results suggest that while investors share some concerns about the audit, their concerns are not significant enough to influence investment behavior, which complements archival research. Results also suggest that component auditor use could have an unintended consequence for the lead auditor's responsibility for the audit. JEL Classifications: M42; M4.