Park, Jaecheol, Pauline Wu, Rajesh Vijayaraghavan, Gene Moo Lee. “Client AI Adoption and Auditing: Evidence from Process- and Product-Oriented AI”, Under Review.

• Presentations: TBD.

Artificial Intelligence (AI) is transforming firms’ information production, operations, and business models, with important implications for financial reporting and external auditing. We examine how auditors respond to client AI adoption, focusing on audit pricing and audit outcomes. Using textual disclosures in Form 10-K filings, we construct a novel firm-year measure of client AI adoption and further decompose it into AI embedded in internal processes and AI embedded in products and services. Using U.S. public firm data from 2010 to 2022 and a long-difference research design, we find that client AI adoption improves reporting discipline but does not lead to systematic changes in audit fees, consistent with offsetting efficiency and risk effects. When we distinguish between types of AI adoption, however, we find opposing audit responses. Process-oriented AI adoption leads to lower audit fees and improved reporting discipline, consistent with audit efficiency gains. In contrast, product-oriented AI adoption increases reporting complexity and risk, leading auditors to increase monitoring and scrutiny. Consistent with increased monitoring and error detection, product-oriented AI adoption increases the likelihood of subsequent financial restatements but not material misstatements, suggesting improved detection rather than deterioration in reporting quality. Cross-sectional analyses show that these effects vary with client complexity, operating performance, governance, and auditor industry expertise. Overall, our findings indicate that client AI adoption reshapes how auditors allocate effort, assess risk, and deploy monitoring, highlighting how technological change alters the audit production process and the financial reporting environment.