Auditor subgroup status and audit quality

Qiang Cao and Nanwei Hu

China Journal of Accounting Studies, 2018, vol. 6, issue 3, 362-393

Abstract: Auditors typically separate into different auditor subgroups within the offices of audit firms. The interaction between informal subgroups significantly affects the audit process and audit quality. In this paper, we examine the effect of auditor subgroup status on audit quality in the context of Chinese culture, and study the moderating effect of positive direct contact on the relationship between group status and audit quality. Based on 50 mergers of Chinese audit firms between 1990 and 2016, we identify 106 auditor subgroups in 53 offices located in China. With this data, we find that the clients’ earnings management of low-status auditor subgroups is significantly higher after mergers compared with that of high-status auditor subgroups. In addition, when there is positive direct contact between auditor subgroups within an office, the deterioration extent of clients’ earnings management of low-status auditor subgroups declines compared with that of high-status auditor subgroups. The results of our analyses indicate that: (1) low-status auditor subgroups have a higher motivation to maintain or improve their position within the office and to safeguard their interests, they are more likely to behave opportunistically, and their audit quality will be worse; and (2) positive direct contact can effectively improve intergroup relationships and mitigate the adverse effects of auditor subgroup status on audit quality. Our research on subgroup status and intergroup contact extends the existing research boundaries of audit quality, and also provides more direct and reliable empirical evidence for the interaction between subgroups within the same office.

Date: 2018
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DOI: 10.1080/21697213.2018.1567119

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