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Journal of Undergraduate Research

Keywords

audit quality, subsidiary audits, financial statements

College

Marriott School of Management

Department

Accountancy

Abstract

International and national accounting standard setters have spent significant amounts of time discussing and making rules about the consolidation of company’s financial statements (ASB 2009; PCAOB 2008, 2010; IAASB 2007; FASB 2010). One of the focuses of these discussions is how auditors should respond to the consolidation process when performing group audits (Glover et al. 2008). A group audit is an audit performed on an entity with multiple locations or components, with separately audited financial information included in consolidated or group financial statements (Glover et al. 2008). While previous research has examined how the consolidation process affects the financial statement quality of the consolidated entity as a whole (e.g., Okuda and Shiiba 2010; Wiedman and Wier 1999), no academic research has investigated if the consolidation process impacts the accounting risk of subsidiary companies (accounting risk is the risk that clients’ financial statements contain misleading or fraudulently reported numbers (Price et al. 2010)). In this study, we begin to fill this void by examining if the consolidation process impacts the accounting risk of a subsidiary company that also issues its own stand-alone financial reports.

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