Do Social Ties between CEOs and Engagement Audit Partners Affect Audit Fees and Audit Quality?

• In Event: Determinants of Audit Fees

Abstract

Combining two strands of research in finance and auditing, we examine whether social ties (i.e., the educational background or alma mater relationship) between CEOs and engagement audit partners affect audit efforts and audit quality. Using novel data from Korean Big 4 audit market in 2009, we find that audits provided by socially tied engagement partners are associated with audit fee premiums, but not with audit hours. We also find that socially tied engagement audit partners provide high quality audits, proxied by low deviation from normal accruals. These findings are inconsistent with either a collusion or efficient information sharing scenario. Although suggestive, the results are rather consistent with a sweetheart deal scenario where friends with money in the social network provide their friends with sweetheart deals based on favoritism. Overall, we do not find any evidence that social ties between CEOs and engagement audit partners lead to dysfunctional behaviors in the audit setting.

Authors

• Soo Young Kwon, Korea University

• Han Yi, Korea University