Web of Negligence: Team Interactions as a Conduit for Audit Misbehavior

54 Pages Posted: 2 Aug 2016 Last revised: 21 Mar 2024

See all articles by Bingbing Hu

Bingbing Hu

Hong Kong Baptist University (HKBU)

Lixin (Nancy) Su

The Hong Kong Polytechnic University - School of Accounting and Finance

Donghui Wu

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

Date Written: May 1, 2021

Abstract

Using a comprehensive sample of public-company audits in China, we document a contagion of audit misbehavior among individual auditors (i.e., CPAs) through audit-team networks. Regulators sanction CPAs whose audits are deemed to have failed. We find that sanctioned CPAs systematically provide low-quality audits during their audit-failure period. Importantly, we document strong evidence that CPAs who have co-signed with the sanctioned CPAs on non-sanctioned audits also exhibit low quality in other audits during the sanctioned CPAs’ audit-failure period, and such a contagion effect dissipates gradually among CPAs who are more remotely connected to the sanctioned CPAs. Additional analysis reveals that the increase in clientele size is likely the economic incentive underlying the transmission of audit misbehavior. By identifying audit team interactions as a specific mechanism through which negligence spreads across CPAs, our study sheds novel insights on the auditor learning.

Keywords: audit quality, contagion, teamwork, sanction

JEL Classification: M40, M42, M48, D83

Suggested Citation

Hu, Bingbing and Su, Lixin (Nancy) and Wu, Donghui, Web of Negligence: Team Interactions as a Conduit for Audit Misbehavior (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=2816435 or http://dx.doi.org/10.2139/ssrn.2816435

Bingbing Hu

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Lixin (Nancy) Su

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M730, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852-2766-7772 (Phone)
852-2330-9845 (Fax)

Donghui Wu (Contact Author)

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/

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