Hospitality and auditor independence: do gifts blind the eyes?

Xingqiang Du

China Journal of Accounting Studies, 2017, vol. 5, issue 4, 420-448

Abstract: In the Chinese audit market, some firms provide hospitality to their auditors. There is a well-known saying in China: ‘Gifts blind the eyes and there is no such thing as a free lunch’. The phenomenon provides researchers with a unique setting to examine whether hospitality (proxied by free food and drink) can impair actual auditor independence. Using a sample of Chinese listed firms during the period of 2001–2010, my findings show that hospitality is significantly positively associated with discretionary accruals, and further hospitality is significantly negatively associated with auditors’ propensity to issue modified audit opinions. These findings, taken together, imply that some Chinese listed firms compromise auditor independence and establish bonding relations with their auditors via hospitality. This study validates the impairment of hospitality on actual auditor independence, lending important support to the existing ethical standards about hospitality in the auditing profession.

Date: 2017
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DOI: 10.1080/21697213.2017.1423776

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