The Role of Relative Societal Trust in Group Audit Quality: Evidence from U.S. Multinational Firms

We investigate whether and how societal trust, an informal monitoring mechanism, matters in multinational group audits. Societal trust refers to a willingness to trust and the trustworthiness of associated parties. In a group audit setting, higher levels of trust among auditors are expected to restrain component auditors’ opportunistic acts, improve information environment, and enhance communications between principal auditor and component auditors, resulting in better group audit quality. Using a sample of U.S. firms from 2017 to 2020, we find that the societal trust of component auditors’ located countries is negatively associated with both financial restatements and signed discretionary accruals. In relative term, we find that when the principal auditor is more willing to trust its component auditors, the positive effect of the component auditors’ trust on group audit quality retains its significance, or vice versa. Overall, the results suggest that (relative) societal trust acts as an effective informal institution in facilitating multinational group auditing services by enhancing audit quality.