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Client Following Former Audit Partners and Audit Quality: Evidence from Unforced Audit Firm Changes in China

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  • Su, Xijia
  • Wu, Xi

Abstract

In China's audit market, audit clients occasionally follow an audit partner who moves to another audit firm in an unforced setting (i.e., not due to the predecessor audit firm suffering regulatory sanctions). By examining a sample of Chinese listed companies during 2001–2013, we find that turnover audit partners are significantly less likely to issue a modified audit report to their unforced follower clients, as compared either with all other audits in the same successor audit firm in the same year, or with post-follow audits of forced follower clients (where the predecessor audit firm suffers regulatory sanctions). We also document evidence of turnover partners treating unforced follower clients favorably prior to the partner turnover event. Our evidence suggests that a close audit partner–client bonding impairs audit quality when lacking regulatory and public attention, and has implications for regulators, investors, and audit firms' quality control in emerging markets where clients are usually closely tied to audit partners rather than to the audit firm, and where a non-compete agreement between an audit partner and the audit firm is unavailable or weakly enforced.

Suggested Citation

  • Su, Xijia & Wu, Xi, 2016. "Client Following Former Audit Partners and Audit Quality: Evidence from Unforced Audit Firm Changes in China," The International Journal of Accounting, Elsevier, vol. 51(1), pages 1-22.
    • Handle: RePEc:eee:accoun:v:51:y:2016:i:1:p:1-22
    DOI: 10.1016/j.intacc.2016.01.001
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    References listed on IDEAS

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    Cited by:

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    3. Yangyang Chen & Jun Huang & Ting Li & Jeffrey Pittman, 2022. "It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 901-963, June.
    4. MohammadRezaei, Fakhroddin & Mohd-Saleh, Norman & Ahmed, Kamran, 2018. "Audit Firm Ranking, Audit Quality and Audit Fees: Examining Conflicting Price Discrimination Views," The International Journal of Accounting, Elsevier, vol. 53(4), pages 295-313.
    5. Yujie Zhao & Nianhang Xu & Donghua Zhou & Kam C. Chan, 2020. "Audit partner rotation and negative information hoarding: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4693-4722, December.
    6. Zhang, Min & Xu, Haoran & Li, Xu, 2017. "The Effect of Previous Working Relationship between Rotating Partners on Mandatory Audit Partner Rotation," The International Journal of Accounting, Elsevier, vol. 52(2), pages 101-121.

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    More about this item

    Keywords

    Audit partner turnover; Follower clients; Modified audit opinion; China;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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