Social Trust and Auditor Reporting Conservatism

Deqiu Chen (), Li Li (), Xuejiao Liu () and Gerald J. Lobo ()
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Deqiu Chen: University of International Business and Economics
Li Li: University of International Business and Economics
Xuejiao Liu: University of International Business and Economics
Gerald J. Lobo: University of Houston

Journal of Business Ethics, 2018, vol. 153, issue 4, No 10, 1083-1108

Abstract: Abstract We examine the implications of social trust for auditor reporting conservatism. Using a sample of listed companies in China, we find that clients located in high-trust regions are less likely to receive a non-clean audit opinion. This negative impact of social trust on auditor reporting conservatism increases (decreases) when the client’s parent firm operates in a region of higher (lower) social trust, suggesting that social trust is contagious from a parent firm to its subsidiaries in a consolidated entity. We provide evidence that the trust contagion is more pronounced for clients with a higher percentage of parent-appointed directors on their boards and clients whose parent firm has fewer subsidiaries. These findings indicate that monitoring and, to a lesser extent, personnel rotation may serve as potential channels of trust contagion. We also find that the impact of trust is more pronounced when the client is located closer to its audit firm, when the client’s parent firm is a state-owned enterprise or holds a higher percentage of the client’s shares, and when the client is associated with greater discretionary accruals. We provide further evidence that it is client rather than auditor trustworthiness that influences auditor reporting conservatism, auditors charge trustworthy clients lower fees, and clients from high-trust regions are less likely to manipulate earnings. Overall, our evidence suggests that social trust alleviates auditor concern about client moral hazard.

Keywords: Auditor reporting conservatism; Geographic proximity; Monitoring; Personnel rotation; Social trust; Trust contagion (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (28)

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DOI: 10.1007/s10551-016-3366-5

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