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This paper examines whether outsourcing and offshoring of independent audit procedures affect bank loan officers' perceptions of financial statement reliability and loan decisions. A 2 x 2 between-subjects experimental design is utilized to investigate the main and interactive effects of outsourcing and offshoring of audit procedures. The results provide empirical evidence that sourcing (insourced or outsourced) or location (onshore or offshore) of independent audit procedures does not impact bank loan officers' perceptions and decisions. These implications are significant for accounting researchers, practitioners and policy setters.
INTRODUCTION
The use of outsourcing, especially offshore outsourcing, has sparked concerns by policymakers and the general public. There is a concern in the accounting profession about the impact of outsourcing and offshoring. PCAOB expressed concern that there is an increase in offshoring of audit procedures to relatively low-cost labor. These procedures are not known to users of financial statements (PCAOB, 2011). On the other hand, accounting firms are of the opinion that audit work that involves outsourcing and offshoring of audit procedures are of equivalent or higher quality compared to audit work not outsourced and offshore. However, studies show that people have negative perceptions concerning outsourcing especially offshoring (Blackman, Freedman, & Levy, 2004; Brody, Coulter, & Jewell, 2006; Daugherty, Dickins, & Fennema, 2013; Downey, 2017; Lyubimov, Arnold, & Sutton, 2013).
The first concern of offshoring is the local auditor's ability to accurately supervise audit work (i.e., distance increases affect perceptions of audit quality) (Blackman et al., 2004; Lyubimov et al., 2013; Mintz, 2004; Sunderland & Trompeter, 2017). Lyubimov et al. (2013) found that jurors perceived work performed by another firm located outside the country to have the lowest quality and the highest risk.
A second concern is a legal liability involving audit failure. Studies show that jurors award the highest damages in an audit failure when the work is completed in another country by the auditor of another firm (Daugherty et al., 2013; Lyubimov et al., 2013). Daugherty et al. (2013) find that jurors assessed a higher damage for work offshore to India compared to work performed in the U.S. despite the level of judgment involved. Also, Lyubimov et al. (2013) find that jurors assessed higher damages as the audit procedures move further away from the primary auditor.
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