Do Social Ties between Individual Auditors and Client Executives Matter to Audit Quality?

• In Event: Auditing 5

Abstract

The objective of this paper is to investigate whether and how the social ties between individual auditors and client executives affect audit quality using a large sample of publicly traded firms in China. We define social ties between individual auditors and client executives as “working or educational alumni.” We find that clients with social ties are significantly and positively associated with abnormal accruals and the presence of reporting small profits, and are more likely to receive a clean audit opinion compared to clients without social ties. In addition, we find that the social tie effect on audit quality can be mitigated by several personal characteristics of individual auditors, such as partner, female, accounting major, auditing experience, etc. Furthermore, we find that connected clients are more likely to downward restate their audited earnings in subsequent years. Overall, our study sheds new light on the impact of social ties between individual auditors and client executives on audit quality.

Authors

• Rong Yang, Rochester Institute of Technology

• Baolei Qi, Xi'an Jiaotong University, China

• Gaoliang Tian, Xi'an Jiaotong University