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

Brian M. Lam, Phyllis Lai Lan Mo and Md Jahidur Rahman

Managerial Auditing Journal, 2024, vol. 39, issue 2, 113-137

Abstract: 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.

Keywords: Auditor independence; Client importance; Secrecy culture (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-11-2022-3763

DOI: 10.1108/MAJ-11-2022-3763

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