Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality?

53 Pages Posted: 12 Nov 2016 Last revised: 14 Nov 2016

See all articles by Xianjie He

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Oliver M. Rui

China Europe International Business School (CEIBS)

Donghui Wu

The Chinese University of Hong Kong

Date Written: November 11, 2016

Abstract

We examine whether social ties between engagement auditors and audit committee members shape audit outcomes. Although these social ties can facilitate information transfer and help auditors alleviate management pressure to waive correction of detected misstatements, cozy interpersonal relations can undermine auditors’ monitoring of the financial reporting process. We measure social ties by alma mater connections, professor-student bonding, and employment affiliation and audit quality by the propensity to render modified audit opinions, financial reporting irregularities, and firm valuation. Our evidence implies that social ties between engagement auditors and audit committee members impair audit quality. In additional results consistent with expectations, we generally find that this relation is concentrated where social ties are more salient, or firm governance is relatively poor and agency conflicts are more severe. Implying reciprocity stemming from social networks, we also report some suggestive evidence that audit fees are higher in the presence of social ties between an engagement auditor and the audit committee. Collectively, our analysis lends support to the narrative that the negative implications -- namely, worse audit quality and higher audit fees -- of these social ties may outweigh the benefits.

Keywords: Social ties; External auditors; Audit committee

JEL Classification: A14; G30; M42

Suggested Citation

He, Xianjie and Pittman, Jeffrey A. and Rui, Oliver M. and Wu, Donghui, Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality? (November 11, 2016). Available at SSRN: https://ssrn.com/abstract=2868205 or http://dx.doi.org/10.2139/ssrn.2868205

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

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/

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