||Do social ties between auditors and executives affect audit quality？
||Graduate Institute of Finance (on the job class)
The purpose of this article is to explore whether the alumni connection between audit partners and senior executives affects audit quality, and further explore whether the impact of alumni connection is different between Big 4 and non-Big 4 accounting firms. In this study, a total of 8,500 listed and over-the-counter companies in the 13 years from 2006 to 2018 were used as research samples. The empirical results show that the connection between the alumni relationship between audit partners and senior executives will reduce the audit quality, and this effect is more pronounced in non-Big 4 accounting firms. Finally, this research proposes suggestions and ideas based on the research results, hoping to provide directions for how to maintain better independence in the audit process and the regulatory part of government agencies, and hope to weaken the adverse effects caused by alumni links.
Alsuhaibani, A. (2018). “The impact of social ties between CEOs and CFOs on financial reporting quality” Case Western Reserve University.
Bamber, L. S., J. Jiang, and I. Y. Wang. 2010. “What’s My Style? The Influence of Top Managers on Voluntary Corporate Financial Disclosure.” The Accounting Review 85(4):1131-1162.
Baolei Qia, Rong Yangb and Gaoliang Tiana (2017). “Do social ties between individual auditors and client CEOs/CFOs matter to audit quality?” Asia-Pacific Journal of Accounting & Economics 24(3-4):440-444.
Basioudis, I. 2007. “Auditor’s Engagement Risk and Audit Fees: The Role of Audit Firm Alumni.” Journal of Business Finance & Accounting 34(9):1393–1422.
Becker, C., M. DeFond, J.Jiambalvo, and K. Subramanyam, 1998. “The effect of audit quality on earnings management.” Contemporary Accounting Research 15(1):1-24.
Bhowmik, D., and E. Rogers. 1971. “Homophily-heterophily: Relational concepts for communication research.” Public Opinion Quarterly 34(4):523–538.
Bian, Y. J. 1997. “Bringing Strong Ties Back in: Indirect Ties, Network Bridges, and Job Searches in China.” American Sociological Review 62(3):366–385.
Bishop, C. C., F. T. DeZoort, and D. R. Hermanson. 2017. “The effect of CEO social influence pressure and CFO accounting experience on CFO financial reporting decisions.” AUDITING: A Journal of Practice & Theory 36(1):21-41.
Bruynseels, L., and E. Cardinaels. 2014. “The audit committee: Management watchdog or personal friend of the CEO?” The Accounting Review 89(1):113–145.
Cheng, L., and A. Rosett. 1991. “Contract with a Chinese Face: Socially Embedded Factors in the Transformation from Hierarchy to Market.” Journal of Chinese Law 143(5): 1978–1989.
Chen, S., Sunny Y. J. Sun, and D. Wu. 2010. “Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis.” The Accounting Review 85(1): 127–158.
Cohen, L., A. Frazzini, and C. J. Malloy. 2010. “Sell-Side School Ties.” The Journal of Finance 65 (4): 1409–1437.
DeAngelo, L. E. (1981). “Auditor size and audit quality.” Journal of Accounting and Economics 3(3):183-199.
DeChow, P. M. and I. D. Dichev. 2002. The quality accruals and earnings: The role of accrual estimation errors. The Accounting Review 77(Supplement):35-59.
DeChow, R. G. Sloan,and A. P. Sweeney.1995. “Detecting earnings management.” The Accounting Review 70(2):193-225.
DeFond, M., and J.Jiambalvo, 1994.”Debt covenant violations and manipulations of accruals.” Journal of Accounting and Economics 17(1-2):145-176.
Desai, H., C. E. Hogan, and M. S. Wilkins. 2006. “The reputational penalty for aggressive accounting: Earnings restatements and management turnover.” The Accounting Review 81(1):83-112.
Diser, V., and U. Schäfer. 2017. “The allocation of responsibility between CEO and CFO for financial misreporting: Implications for earnings quality.” Working paper: LMU Munich and University of Zurich
Engelberg, J., P. Gao, and C. A. Parsons. 2012. “Friends with Money.” Journal of Financial Economics 103(1): 169–188.
Engelberg, J., P. Gao, and C. A. Parsons. 2013. “The Price of a CEO’s Rolodex.” Review of Financial Studies 26(1): 79–114
Feng, M., W. Ge, S. Luo, and T. Shevlin. 2011. “Why do CFOs become involved in material accounting manipulations?” Journal of Accounting and Economics 51(12):21-36
Fracassi, C., and G. A. Tate. 2012. “External networking and internal firm governance.” Journal of Finance 67(1): 153–194.
Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2005. “The market pricing of accruals quality.” Journal of Accounting and Economics 39(2):295-327
Francis, J. 2011. “A Framework for Understanding and Researching Audit Quality.” Auditing:A Journal of Practice & Theory 30(2): 125–152
Frino, A., M. Y. Lim, V. Mollica, and R. Palumbo. 2015. “CEO narcissism and earnings management.” Working paper: Macquarie University and University of ChietiPescara
Geiger, M. A., C. S. Lennox, and D. S. North. 2008. “The hiring of accounting and finance officers from audit firms: How did the market react?” Review of Accounting Studies 13(1): 55–86.
Gibbons, D. E. 2004. “Friendship and advice networks in the context of changing professional values.” Administrative Science Quarterly 49(2): 238–262
Gounopoulos, D., and H. Pham. 2016. “Credit rating impact on earnings management around initial public offerings.” Working paper: University of Bath.
Granovetter, M. 1985. “Economic action and social structure: The problem of embeddedness. “ American journal of sociology 91(3):481-510
Guan, Y., L. Su, D. Wu, and Z. Yang. 2016. “Do school ties between auditors and client executives influence audit outcomes? “Journal of Accounting and Economics 61 (2-3):506-525.
Gul, F. A., D. Wu, and Z. Yang. 2013. “Do Individual Auditors Affect Audit Quality? Evidence from Archival Data.” The Accounting Review 88(6): 1993–2023
Guo, J., P. Huang, Y. Zhang, and N. Zhou. 2016. “The effect of employee treatment policies on internal control weaknesses and financial restatements.” The Accounting Review 91(4):1167-1194.
Ham, C., M. Lang, N. Seybert, and S. Wang. 2017. “CFO narcissism and financial reporting quality.” Journal of Accounting Research
Harrington, B. 2016. “Social structure, power, and financial fraud.” In Global Financial Crisis and Its Aftermath: Oxford University Press 340-355.
Hennes, K. M., A. J. Leone, and B. P. Miller. 2008. “The importance of distinguishing errors from irregularities in restatement research: The case of restatements and CEO/CFO turnover. ” The Accounting Review 83(6):1487-1519.
Hribar, P., and N. T. Jenkins. 2004. “The effect of accounting restatements on earnings revisions and the estimated cost of capital.” Review of Accounting Studies 9(2):337-356.
Hwang, B.-H., and S. Kim. 2009. “It pays to have friends.” Journal of Financial Economics 93(1):138-158.
Ingram, P., and P. W. Roberts. 2000. “Friendships among competitors in the Sydney hotel industry. “American journal of sociology 106(2):387-423.
Ishii, J., and Y. Xuan. 2014. “Acquirer-target social ties and merger outcomes.” Journal of Financial Economics 112(3):344-363.
Ittonen, K., E. Vähämaa, and S. Vähämaa. 2013. “Female Auditors and Accruals Quality.” Accounting Horizons 27(2): 205–228.
Jiang, J. X., K. R. Petroni, and I. Y. Wang. 2010. “CFOs and CEOs: Who have the most influence on earnings management?” Journal of Financial Economics 96(3):513-526.
Kasznik, R. 1999.”On the association between voluntary disclosure and earnings management. Journal of Accounting Research 37(1):57-81.
Kannan, Y. H., T. R. Skantz, and J. L. Higgs. 2014. “The impact of CEO and CFO equity incentives on audit scope and perceived risks as revealed through audit fees.” AUDITING: A Journal of Practice & Theory 33(2):111-139.
Kothari, S. P., A. J. Lepme, and C. E. Wasley. 2005. “Performance matched abnormal accrual measures.” Journal of Accounting and Economics 39(1):163-197.
Kwon, S. Y., and H. Yi. 2017. “Do social ties between CEOs and engagement audit partners affect audit quality and audit fees? “Auditing: A Journal of Practice and Theory
Leuz, C., D. Nanda, and P. D. Wysocki. 2003.” Earnings management and investor protection: an international comparison.” Journal of Financial Economics 69(3):505-527.
Leuz, C., and P. D. Wysocki. 2008. “Economic consequences of financial reporting and disclosure regulation: A review and suggestions for future research.” Working paper, University of Chicago.
Khanna, V., E. H. Kim, and Y. A. O. Lu. 2015. “CEO connectedness and corporate fraud.” The Journal of Finance 70(3):1203-1252.
Manon Leensen (2016)“Audit firm rotation, social ties and audit quality” Management Radboud Universiteit Nijmegen
McDonald, M. L., and J. D. Westphal. 2003. “Getting by with the advice of their friends: CEOs' advice networks and firms' strategic responses to poor performance.” Administrative Science Quarterly 48(1):1-32.
Menon, K., and D. Williams. 2004. “Former audit partners and abnormal accruals.” The Accounting Review 79 (4): 1095–1118.
Nelson, M. 2006. “Ameliorating conflicts of interest in auditing: Effects of recent reforms on auditors and their clients.” Academy of Management Review 31(1): 30–42.
Nguyen, B. 2012. “Does the Rolodex Matter? Corporate Elite’s Small World and the Effectiveness of Boards of Directors.” Management Science 58(2): 236–252.
Palmrose, Z. V., and S. Scholz. 2004. “The circumstances and legal consequences of nonGAAP reporting: evidence from restatements.” Contemporary Accounting Research 21(1):139-180.
Smart, A. 1993. “Gifts, Bribes, and Guanxi: A Reconsideration of Bourdieu’s Social Capital.” Cultural Anthropology 8(3): 388–408.
Uzzi, B. 1996. “The sources and consequences of embeddedness for the economic performance of organizations: The network effect.” American sociological review: 674-698.
Westphal, J. D. 1999. “Collaboration in the boardroom: Behavioral and performance consequences of CEO-board social ties.” Academy of Management Journal 42 (1):7-24.
Westphal, J. D., S. Boivie, M. Chng, and D. Han. 2006. “The strategic impetus for social network ties: Reconstituting broken CEO friendship ties.” Strategic Management Journal 27(5):425-445.
Xianjie He, Jeffrey A. Pittman, Oliver M. Rui and Donghui Wu. 2017. “Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality?” American Accounting Association 92(5):61-68.
Yang, H. 2012. “Capital Market Consequences to Managers’ Voluntary Disclosure Styles.” Journal of Accounting & Economics 53(1–2): 167–184.
Ye, P., E. Carson, and R. Simnett. 2011. “Threats to Auditor Independence: The Impact of Relationship and Economic Bonds.” Auditing: A Journal of Practice & Theory 30(1): 121–148.