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

Xianjie He (First Author), Oliver Meng Rui (Participant Author), Jeffrey Pittman (Participant Author), Donghui Wu (Participant Author)

Research output: Contribution to journalJournal

99 Citations (Web of Science)

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, 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.
Original languageEnglish
Pages (from-to)61-87
JournalThe Accounting Review
Volume92
Issue number5
DOIs
Publication statusPublished - 2017

Project name

MOE Project of Key Research Institute of Humanities and Social Sciences at Universities

Project sponsor

其他

Project No.

14JJD630005

Keywords

  • audit committee
  • external auditors
  • social ties

Indexed by

  • FT
  • Scopus
  • SSCI

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