Auditor-client Reciprocity: Evidence from Forecast-issuing Brokerage Houses and Forecasted Companies Sharing the Same Auditor

Posted: 2 Mar 2021

See all articles by Simon Fung

Simon Fung

Deakin University

Like Jiang

University of Melbourne - Faculty of Business and Economics

Jeffrey Pittman

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

Yu Wang

Nanjing University

Shafu Zhang

Nanjing University

Date Written: January 7, 2021

Abstract

We examine whether auditors accommodate the information needs of some clients by sharing their private information learned from other clients in their portfolio. In analyzing the setting where the forecast-issuing brokerage houses and the forecasted companies engage the same auditor, we find that the brokerage houses issue more accurate forecasts on companies for which they share an auditor, implying that auditors transfer private information on other clients to cater to the information needs of their brokerage house clients. In compensation, we find that these auditors are more likely to secure future IPO audits from IPO deals sponsored by their brokerage house clients who benefit from the more accurate forecasts. In cross-sectional analysis, we report that the impact on forecast accuracy rises when: the auditors have more opportunities for information exchange; the brokerage house clients have stronger demand for private information; the shared auditors are likely to possess valuable private information; the auditors are located in provinces with poor investor protection; and the brokerage house clients have wider scope to recommend IPO audit services. Our results are robust to difference-in-differences research designs with propensity-score matching. Overall, we provide evidence that auditors favor some clients in their portfolio by sharing private information of other clients in anticipation of reciprocity in the form of lucrative future engagements.

Suggested Citation

Fung, Simon and Jiang, Like and Pittman, Jeffrey A. and Wang, Yu and Zhang, Shafu, Auditor-client Reciprocity: Evidence from Forecast-issuing Brokerage Houses and Forecasted Companies Sharing the Same Auditor (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3762170

Simon Fung (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria
Australia

Like Jiang

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia

Jeffrey A. Pittman

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)

Yu Wang

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Shafu Zhang

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
342
PlumX Metrics