Does Auditors’ Reputation ‘Discourage’ Related Party Transactions? The French Case

Posted: 9 Oct 2012

See all articles by Moez Bennouri

Moez Bennouri

GSCM-Montpellier Business School; NEOMA Business School

Mehdi Nekhili

Université du Maine; ICD International Business School; Université du Maine

Philippe Touron

François Rabelais University

Date Written: June 6, 2012

Abstract

Regulators, standard setters and market participants consider related-party transactions a major issue in financial markets because they can be used to expropriate minority shareholders. External auditing is considered an important governance mechanism that can control the propensity of insiders to use these transactions. We consider that an auditor’s reputation is a surrogate for the quality of audit reports, and test the extent to which it may reduce the number of related-party transactions initiated by clients. We use a unique data set with a sample of 85 French firms over the period 2002–2008. The period under study includes the change in regulatory environment in Europe in 2005 with the compulsory adoption of IFRS standards. The French legal system allows us to discern how the reputation of audit firms is a consideration that may make insiders less likely to initiate related-party transactions. The results show that related-party transactions occur less frequently when external auditors have a notably high reputation. Interestingly, auditors’ reputation seems to substitute for the usual corporate governance variables to decrease the frequency of “abnormal” related-party transactions. The effect of reputation is, however, less important in a more transparent environment like the one implemented with the adoption of the IFRS standards. These results are obtained after controlling for the selection bias related to the choice of external auditors, using a two-step Heckman procedure.

Keywords: Related-party transaction, Audit, Reputation, Corporate governance, Ownership structure

JEL Classification: G34, G38, K33, M42

Suggested Citation

Bennouri, Moez and Nekhili, Mehdi and Touron, Philippe, Does Auditors’ Reputation ‘Discourage’ Related Party Transactions? The French Case (June 6, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2084070 or http://dx.doi.org/10.2139/ssrn.2084070

Moez Bennouri (Contact Author)

GSCM-Montpellier Business School ( email )

2300, Avenue des Moulins
Montpellier, 34185
France

NEOMA Business School ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, 76825
France

HOME PAGE: http://www.rouenbs.fr/

Mehdi Nekhili

Université du Maine ( email )

72085 Le Mans Cedex 9
France

ICD International Business School

12 rue Alexandre Parodi
Paris, 75010
France

Université du Maine ( email )

72085 Le Mans Cedex 9
France

Philippe Touron

François Rabelais University ( email )

60 rue du Plat D'Etain
Tours, 37020
France

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