The Effect of the Choice of Shared Audit Reports on Corporate Credit Risk

Taiwan SAS No. 54 ＂Special Considerations-Audits of Group Financial Statements＂ was implemented on July 1, 2015. This standard severely restricts the engaging auditor to issue shared audit reports to its group enterprise client whose subsidiaries are audited by other component auditors. This implies a group enterprise's financial report with shared audit report has worse audit quality than those audited only by the engaging auditor. However, whether this argument is applicable to Taiwan or not requires further empirical evidences. Therefore, this study takes the corporate credit risk index of group enterprises as the proxy of perceived audit quality by the capital markets, and discusses the relationship between the corporate credit risk index of group enterprises and the choice of shared audit reports, so as to examine whether the shared audit opinion symbolizes inferior audit quality or not. The results show that the corporate credit risk index of a group enterprise is significantly higher while the group enterprise is subject to the shared audit report, regardless of whether our experimental variable, SHARE (the group enterprise is issued shared audit report by engagement auditor), is an endogenous variable or an exogenous one. The results are robust when we substitute SHARE to SHARE% (the ratio of assets audited by the component auditors to the total assets) in a sub-sample of group enterprises with shared audit reports. This empirical result supports the position of auditing standard setters that restricting the issuance of shared audit reports contributes to the improvement of audit quality.