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

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, close interpersonal relations can...

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Veröffentlicht in:The Accounting review 2017-09, Vol.92 (5), p.61-87
Hauptverfasser: He, Xianjie, Pittman, Jeffrey A., Rui, Oliver M., Wu, Donghui
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container_end_page 87
container_issue 5
container_start_page 61
container_title The Accounting review
container_volume 92
creator He, Xianjie
Pittman, Jeffrey A.
Rui, Oliver M.
Wu, Donghui
description 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, close 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 consistent with expectations, 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.
doi_str_mv 10.2308/accr-51696
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subjects Audit committees
Audit fees
Audit quality
Auditors
Audits
Employment
Fees & charges
Financial reporting
Governance
Interpersonal relations
Reciprocity
Social networks
Valuation
title Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality?
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