Do school ties between auditors and client executives influence audit outcomes?

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Date: April-May 2016
From: The Journal of Accounting and Economics(Vol. 61, Issue 2-3)
Publisher: Elsevier B.V.
Document Type: Article
Length: 284 words

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Abstract :

To link to full-text access for this article, visit this link: Byline: Yuyan Guan, Lixin (Nancy) Su, Donghui Wu, Zhifeng Yang Abstract: We identify connected auditors as those who attended the same university as the executives of their clients. Using manually collected data from China, we find that connected auditors are more likely to issue favorable audit opinions, especially for financially distressed clients. Moreover, companies audited by connected auditors report significantly higher discretionary accruals, are more likely to subsequently restate earnings downward, and have lower earnings response coefficients. Lastly, connected auditors earn higher audit fees. Collectively, our evidence suggests the impairment of audit quality when auditors and client executives have school ties and the presence of social reciprocity derived from school ties. Author Affiliation: (a) City University of Hong Kong, Hong Kong (b) The Hong Kong Polytechnic University, Hong Kong (c) The Chinese University of Hong Kong, Hong Kong Article History: Received 29 January 2014; Revised 11 September 2015; Accepted 18 September 2015 Article Note: (footnote) [star] We are grateful for the helpful comments and suggestions of Ole-Kristian Hope, Steve Huddart, Sanjay Kallapur, Kalin Kolev, S.P. Kothari (editor), Grace Pownall, Gordon Richardson, Srinivasan Sankaraguruswamy, Katherine Schipper, T.J. Wong, Lijun Xia, Zili Zhuang, an anonymous reviewer, and participants at 2013 International Symposium on Accounting and Finance Issues in China's Capital Market (Shanghai), 2014 American Accounting Association Annual Meeting, 2014 MIT Asian Conference in Accounting, 2015 European Accounting Association Annual Congress and the workshops in National University of Singapore and Xiamen University. Yuyan Guan appreciates Strategic Research Grant from City University of Hong Kong (Project ID: 7004108). Donghui Wu gratefully acknowledges research funding from Business School, The Chinese University of Hong Kong (Project ID: 4057030).

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Gale Document Number: GALE|A471310707