Do Social Ties between Individual Auditors and Client CEOs/CFOs Matter to Audit Quality?

Posted: 30 Dec 2014

See all articles by Baolei Qi

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management

Rong Yang

Rochester Institute of Technology

Gaoliang Tian

Xi'an Jiaotong University (XJTU)

Date Written: January 30, 2014

Abstract

The objective of this paper is to investigate whether and how the social ties between individual auditors and client CEOs/CFOs affect audit quality using a large sample of publicly traded firms in China. We define social ties between individual auditors and client CEOs/CFOs 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 clean audit opinions compared to clients without social ties. Moreover, we find that the working-tie effect on audit quality is stronger than the school-tie effect. 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 socially 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.

Suggested Citation

Qi, Baolei and Yang, Rong and Tian, Gaoliang, Do Social Ties between Individual Auditors and Client CEOs/CFOs Matter to Audit Quality? (January 30, 2014). Available at SSRN: https://ssrn.com/abstract=2543858

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Rong Yang (Contact Author)

Rochester Institute of Technology ( email )

Saunders College of Business
Rochester Institute of Technology
Rochester, NY 14623
United States

Gaoliang Tian

Xi'an Jiaotong University (XJTU) ( email )

26 Xianning W Rd.
Xi'an Jiao Tong University
Xi'an, Shaanxi 710049
China

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