Bullwhip ripples in external assurance: supply chain risks and auditor responses

Pengcheng Ma and Chenyi Li

Managerial Auditing Journal, 2026, vol. 41, issue 7, 1522-1548

Abstract: PurposeThis study aims to investigate how amplified fluctuations in supply and demand (the bullwhip effect) influence auditors’ risk assessments and pricing decisions. By examining whether operational instabilities spill over into external audit fees and disclosures, it aims to clarify the role of supply chain volatility as a key determinant in the audit environment.Design/methodology/approachDrawing on a large sample of Chinese listed firms, the authors construct firm-specific measures of the bullwhip effect by calculating the ratio of the volatility of production to the volatility of demand. These measures are then merged with annual audit-fee data and textual analyses of key audit matters (KAM) in audit reports. A quasi-natural experiment exploiting China’s intelligent supply chain policy is used to address potential endogeneity.FindingsThe results show that heightened supply–demand imbalances are significantly associated with higher audit fees, indicating that auditors perceive and price in this operational volatility as engagement risk. The findings also reveal that, under more pronounced bullwhip distortions, auditors devote greater attention to supply chain–related disclosures in the KAM section, suggesting that operational risks now occupy a central place in external assurance considerations.Originality/valueBy integrating a critical operational factor into traditional audit fee models, this study broadens the understanding of how real-side inefficiencies shape external assurance costs and disclosures. The evidence underscores the importance of supply chain dynamics in auditors’ risk evaluations and highlights how policy interventions aimed at stabilizing supply chain operations can mitigate upstream auditing expenses and informational frictions.

Keywords: Bullwhip effect; Supply chain risk; Audit fees; Key audit matters; External assurance (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-03-2025-4732

DOI: 10.1108/MAJ-03-2025-4732

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