Do School Ties between Auditors and Client Executives Influence Audit Outcomes?

39 Pages Posted: 28 Jan 2014 Last revised: 19 Sep 2015

See all articles by Yuyan Guan

Yuyan Guan

City University of Hong Kong - College of Business

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Zhifeng Yang

Stony Brook University

Date Written: January 28, 2014

Abstract

We identify connected auditors as those who attended the same university as the executives of their clients. Using manually collected data from China, we find that connected auditors are more likely to issue favorable audit opinions, especially for financially distressed clients. Moreover, companies audited by connected auditors report significantly higher discretionary accruals, are more likely to subsequently restate earnings downward, and have lower earnings response coefficients. Lastly, connected auditors earn higher audit fees. Collectively, our evidence suggests the impairment of audit quality when auditors and client executives have school ties and the presence of social reciprocity derived from school ties.

Keywords: School tie, social network, audit quality, audit fee

JEL Classification: G3, M4

Suggested Citation

Guan, Yuyan and Su, Lixin (Nancy) and Wu, Donghui and Yang, Zhifeng, Do School Ties between Auditors and Client Executives Influence Audit Outcomes? (January 28, 2014). Journal of Accounting & Economics (JAE), Vol. 61, No. 2-3, 2016. Available at SSRN: https://ssrn.com/abstract=2386529 or http://dx.doi.org/10.2139/ssrn.2386529

Yuyan Guan (Contact Author)

City University of Hong Kong - College of Business ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-34427136 (Phone)

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Donghui Wu

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

Zhifeng Yang

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

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