We identify connected auditors as those who attended the same university as the executives of their clients. Using manually collected data from China, we find that connected auditors are more likely to issue favorable audit opinions, especially for financially distressed clients. Moreover, companies audited by connected auditors report significantly higher discretionary accruals, are more likely to subsequently restate earnings downward, and have lower earnings response coefficients. Lastly, connected auditors earn higher audit fees. Collectively, our evidence suggests the impairment of audit quality when auditors and client executives have school ties and the presence of social reciprocity derived from school ties.
Bibliographical noteYuyan Guan appreciates Strategic Research Grant from City University of Hong Kong (Project ID: 7004108). Donghui Wu gratefully acknowledges research funding from Business School, The Chinese University of Hong Kong (Project ID: 4057030).
- Audit fee
- Audit quality
- School tie
- Social network