Individual Auditor Social Responsibility and Audit Quality: Evidence from China
Posted: 10 Mar 2020 Last revised: 19 Dec 2020
Date Written: February 24, 2020
Capitalizing on a unique setting in China where auditors disclose their prosocial activities, we examine the role that auditor social responsibility plays in shaping their performance. In one direction, behavior consistency theory implies that individual auditors exhibiting more social commitment in their off-the-job activities behave similarly during engagements, enhancing the quality of their audits. In the other direction, making social contributions may provide insurance-like protection for auditors to reduce regulatory and legal risks, lowering their incentives to provide high quality audits. In a staggered difference-in-differences design, we report a significant fall in the magnitude of companies’ discretionary accruals and the incidence of financial reporting irregularities after their auditors begin contributing to social welfare, relative to companies whose auditors refrain from contributing during the same timeframe. Additional evidence implies that the higher audit quality stems from auditors better protecting their independence and improving their competence in the post-contribution period. Collectively, our results provide insights into the importance of auditors’ prosocial attitudes to their external monitoring.
Keywords: Auditor Social Responsibility, Audit Quality, Auditor Competence, Auditor Independence
JEL Classification: M40, M41, M42
Suggested Citation: Suggested Citation