DAC - Research Seminar - Prof. Like Jiang, University of Melbourne, Australia
Do Audit Partners Compromise Audit Independence for Clients Affiliated with Business Groups? Evidence from the Likelihood of Issuing Modified Audit Opinions in China
Monday 23 September 2019 (17h15 - 19h00) - Anthropole - 3032
We identify a unique independence problem for audit partners who audit clients affiliated with business groups. Since a business group consists of multiple member companies controlled by the same ultimate owner, an audit partner who issues a modified audit opinion to a group-affiliated client risks losing not only that client but also the possibility to extend their audit services to other member companies of the same group. The incentive to obtain future businesses from other group member companies of the group-affiliated client thus constitutes a factor that may lead audit partners to compromise their audit quality. Consistent with our expectations, we show that audit partners are less likely to issue modified audit opinions to group-affiliated clients, and the negative effect of group affiliation on auditor independence is particularly salient when other group members are relatively large and when the incumbent group-affiliated clients themselves are economically less important. We also find that audit partners who indeed issued modified audit opinions to group-affiliated clients are less successful in getting new clients from the same business group. Overall, findings of this study demonstrate how potential business opportunities from an audit client may influence audit partners’ incentive to deliver quality audits and inform both academics and regulators on how audit quality for business group companies may be affected by the unique auditor-client relationship.