Client Importance of Affiliated Business Groups and Audit Partner Independence

• In Event: Auditing 1

Abstract

We use data from Taiwan, where audit partners are required to sign audit reports, to examine whether audit partners may compromise their independence for economically important clients of affiliated business groups, given the important place of these groups in emerging markets. Following Chi et al. (2012), we include both listed and unlisted clients in our sample to construct a more complete client portfolio for each audit partner. Uniquely, we partition the sample into affiliated and non-affiliated companies and separately study these clients for Big4 and non-Big4 auditors, due to their distinct attributes. We employ absolute and signed discretionary accruals as proxies for auditor independence, and use client sales in the same affiliated business group to measure client importance of this group at the audit partner level. We fail to find evidence that client importance of non-affiliated business groups impairs audit partner independence; however, we find that (1) audit partners (whether Big4 or non-Big4) are more likely to compromise their independence for economically important clients of affiliated business groups than those of non-affiliated business groups, and (2) client importance of affiliated business groups is more significantly (and negatively) associated with independence of Big4 audit partners than that of non-Big4 audit partners. More interestingly, we find that the mandatory rotation rule is considerably effective in curbing Big4 audit partners’ lack of independence behavior for the economically important affiliated listed clients. Our results are robust to a variety of sensitivity analyses. While our inferences are limited to the Taiwanese capital market, our study may be of interest to market participants and regulators in other emerging markets where affiliated business groups are also prevalent.

Authors

• Yu-Shan Chang, Tamkang University

• Li-Lin Sunny Liu, California State University, Dominguez Hills

• Chia-Yu Chiang, National Taipei University

• Dana A Forgione, The University of Texas at San Antonio