Business Group Importance and Audit Quality

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  In Roundtable Session: Table 6: Determinants of Audit Quality

Abstract

This paper investigates the relationship between client importance at the business group level (business group importance) and audit quality. Business group importance is calculated as the sum of audit fees for a specific auditor from companies in a business group divided by the total revenues of the auditor. We find that business group importance is positively related to performance matched discretionary accruals. We also find that business group importance does not affect audit quality of large audit firms, while it affects audit quality of small audit firms. Furthermore, business group importance affects audit quality of non-industry specialists, while it does not affect audit quality of industry specialists. For the heterogeneity of business groups, we find that business group importance is related to audit quality only when member companies in the same business group are in different industries. In sum, we find that the more important the business group to an auditor, the lower the audit quality.

Authors

• Chunfei Wang, Central University of Finance & Economics

• Lina Wu, Peking University

• Jian Zhou, University of Hawaii at Manoa