Do Auditors Cater to Clients Before the ESO Announcement? Evidence from Audit Adjustments in China

• In Event: Auditing 4

Abstract

Abstract
This study examines whether auditors cater to clients before the client firms announce Executive Stock Option (ESO) incentive plans in China. We find that auditors likely adjust earnings downward in financial statements before the ESO plan announcement. Next, we compare state-owned enterprises (SOE) and non-state owned enterprises (non-SOE) on the relation between audit adjustments and ESO announcement. We find that non-SOEs are more likely to announce ESO plans than SOEs in the downward audit adjustment earnings sample. There is no difference on the downward audit adjustments between big auditors and small auditors. The results show that auditors with more business ties with the clients are more likely to help client firms to maximize manager’s self-interest by taking advantage of ESO plans.

Authors

• Jun Guo, Rutgers University - Camden

• Songsheng Chen, Beijing Institute of Technology

• Yuanyuan Cao, Beijing Institute of Technology