Unveiling the Paradox of Digital Expertise: How AI and Client Digitalization Are Linked to Lower Audit Quality in U.S. High-Tech Companies
Keywords:
Audit Firms’ Digital Expertise, Clients’ digitalization, Audit QualityAbstract
Purpose – This study investigates the impact of audit firms' digital expertise and clients' digitalization on audit quality (AQ), with a specific focus on uncovering the contradictory relationship in which higher levels of digital capability do not necessarily translate into improved audit outcomes. Design/Methodology/Approach – This study employs a quantitative research design using firms listed on the Nasdaq100 index from 2020–2023. To enhance methodological clarity, the analysis incorporates multivariate regression models with industry- and year-fixed effects. Client digitalization is measured using text-based indicators capturing terms such as "AI technology," "blockchain," "cloud computing," "big data technology," and "digital technology" within annual reports. Audit firm digital expertise is proxied by the proportion of technology-skilled professionals within the firm. Audit quality is assessed using discretionary accruals, enabling a more robust evaluation of how digitalization shapes audit outcomes. A series of robustness checks, including alternative accrual models, strengthen the reliability of the findings. Findings – The results reveal a counterintuitive pattern in which both client digitalization and audit firm digital expertise are associated with lower audit quality. Higher digitalization corresponds to increased discretionary accruals, indicating reduced monitoring effectiveness despite enhanced technological capability. This contradictory outcome suggests that complexity introduced by digital technologies may exceed auditors’ capacity to evaluate technology-driven transactions, thereby diminishing audit quality. Robustness tests confirm the stability of this positive association between digitalization and discretionary accruals. Originality/Value – This study offers a theoretical contribution by demonstrating that digital advancement does not uniformly enhance audit effectiveness; instead, it may produce adverse outcomes due to information opacity, algorithmic complexity, and knowledge asymmetry between auditors and clients. The research also highlights practical implications, showing the need for auditors to recalibrate digital competencies when assessing technologically advanced clients. Additionally, this study acknowledges limitations, including reliance on text-based measures of digitalization and a focus on high-tech U.S. firms, which may constrain generalizability and open avenues for future research.
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