Secrecy culture, client importance, and auditor reporting behavior: an international study

Purpose - This study aims to investigate whether auditors compromise their independence for economically important clients in countries with a secrecy culture. Design/methodology/approach - The authors empirically examine the research question based on a data set of 33 countries for the period from 1995 to 2018. The dependent variable is the auditors’ propensity to issue modified audit opinions, which is a proxy for auditor independence. The authors use relative client size as a proxy for client importance. The authors adopt the Heckman (1979) two-stage model to mitigate the potential endogeneity issue involved in the selection of Big-N auditors. Findings - Using a large sample of firms and controlling for the firm- and country/region-level factors, this study reveals that both Big-N and non-Big-N auditors are more likely to issue modified audit opinions to clients located in countries with a strong secrecy culture relative to those located in other countries. However, Big-N auditors are more likely to issue modified audit opinions for their economically important clients with a secrecy culture relative to their other clients, while no or weaker evidence is found for non-Big-N auditors. The results are consistent and robust to endogeneity tests and sensitivity analyses. Originality/value - This study enriches the literature by providing a new perspective on auditor independence that an auditor’s reporting behavior can vary depending on the client’s importance and auditor type, even under the same secrecy culture.