Public Attention and Auditor Behavior: The Case of Hurun Rich List in China

Abstract

Engendering greater regulatory scrutiny and political costs, client publicity can expose auditors to higher risks. Using the changes in clients’ publicity caused by their controlling owners’ presence on the Hurun Rich List (rich listing) in China, we test the hypothesis that auditor conservatism increases with client publicity. The evidence indicates auditors issue more adverse audit opinions to clients and charge higher fees following the rich listing events. Moreover, we observe that auditors strategically respond to clients with different attributes—for clients whose rich owners’ wealth accumulation is more questionable, auditors choose more stringent audit reporting to better defend themselves from regulatory scrutiny; for clients without such attributes, auditors primarily rely on increasing audit fees to cope with any post-listing increase in audit risks. Our analyses also suggest the impact of rich listings tends to be concentrated among large audit firms with stronger reputation concerns or among engagement auditors with more conservative reporting styles. By showing how auditors manage political risks associated with heightened public scrutiny, we contribute to both the auditing and political cost literature.

Keywords: Political cost; Conservatism; Audit opinion; Audit fee

JEL Classification: D72; L82; L84; M42