Forced Audit Firm Change, Continued Partner‐Client Relationship, and Financial Reporting Quality

Jieping Chen (First Author), Xijia Su (Participant Author), Xi Wu (Participant Author)

Research output: Contribution to journalJournal

19 Citations (Web of Science)

Abstract

This study extends Blouin et al. ([BGR] 2007) by providing partner-level evidence regarding the effect of continued auditor-client relationships on financial reporting quality over a three-year post-switch period. Using a sample of forced audit firm changes in China where the identities of leading audit partners are available, we find that, consistent with BGR (2007), clients with greater earnings management activities are more likely to follow their former audit partners to a new audit firm, and aggressive follower clients who are audited by former partners are less likely to report abnormally high earnings management items in the first post-switch year. Moreover, we find that the financial reporting of aggressive follower clients who continue to be audited by former partners becomes significantly more aggressive in the next two post-switch years; while aggressive follower clients who are audited by non-former partners do not exhibit a similar pattern in the three post-switch years. Our findings indicate that the former partner conservatism as suggested by BGR (2007) may be temporary in nature, and former partners may adopt a strategic approach to auditing follower clients to realize the opportunistic benefits of maintaining a close partner-client relationship.
Original languageEnglish
Pages (from-to)227-246
JournalJournal of Practice and Theory
Volume28
Issue number2
DOIs
Publication statusPublished - 2011

Keywords

  • earnings management
  • forced audit firm change
  • former audit partner

Indexed by

  • ABDC-A*
  • Scopus
  • SSCI

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