Research On The Governance Role Of Shared Auditors In The Supply Chain

Auditing is a critical part of the company's monitoring system,and is also regarded as an important part of the company's governance system.By providing reasonable assurance for financial statements,auditors improve the credibility of accounting information,reduce information asymmetry,enhance resource allocation and contracting efficiency,alleviate agency problems,and protect investor interests.The growing complexity of business transactions and accounting standards increases auditing's potential to add value.According to DeAngelo(1981),audit quality is the market-assessed joint probability that a given auditor will both detect a breach in the client's accounting system,and report the breach.Whether to report errors found depends on auditor's independence,while the ability to detect misconducts depends on auditor's competence.Holding independence unchanged,auditor's competence is a critical factor of audit quality.Competence includes three sub-elements:general knowledge,industry-specific knowledge,and client-specific knowledge.Using auditor size and industry expertise as proxy,the literature mainly focuses the impact of general knowledge and industry-specific knowledge on audit quality and other audit-related governance effects,but whether and how client-specific information affects the governance role of audit also need more exploration.In fact,client-specific knowledge,as necessary information to detect misstatements or fraud,is not only an important component of auditors' competence,but also a direct basis for forming audit opinions.In short,client-specific information influences audit quality,thereby affecting the governance role of the audit.When a company use the same audit firm for annual report auditing with its customers or suppliers,I call it supply chain shared auditors.Compared with non-supply chain shared auditors,supply chain shared auditors obtain more client-specific knowledge,which has a certain impact on the governance role of auditing.Therefore,based on the accountability and auditing control theory,this study systematically investigates the governance role of supply chain shared auditors from the perspectives of the assurance role and information role,and further explores the position and path of supply chain shared auditors in corporate governance.This study includes the following seven chapters:Chapter 1 is introduction.This chapter introduces the research background and significance,clarifies the research purpose and content,proposes research ideas and methods,and finally summarizes expected contributions and innovations.This chapter is the overall planning chapter of this study.Chapter 2 is literature review.This chapter reviews the literature systematically,including research on shared auditors,research on auditor's governance role,and research on the importance of supply chain relationships.Summarizing the literature systematically helps to understand the development of research on shared auditor and the governance role of auditors,discover unexplored areas of the literature,and elicit the motivation and contribution of this paper.Chapter 3 is theoretical analysis.This chapter firstly reviews related theories:principal-agent theory,auditing theory,knowledge redundancy theory and social network theory.Secondly,this chapter clarifies the function of the supply chain shared auditor to exert the governance effect from the basic level and derivative level,and deduces the detailed path of the supply chain shared auditor to exert the corporate governance effect.This chapter lays the theoretical foundation for the following analysis.Chapter 4 is supply chain shared auditor and the comparability of accounting information.This chapter examines the governance role of the supply chain shared auditor from the perspective of the comparability of accounting information.Using a sample of Chinese A-share listed companies from 2010 to 2018,the results show that a pair of supplier and customer companies audited by the same audit firm will have more comparable earnings than a pair of supplier and customer companies audited by two different audit firms.Such effects will be more pronounced when auditors are from big 10 and when supplier and customer firms belong to different industry.In addition,supply chain shared auditors improve the comparability by affecting the consistency of asset impairment accounting policies of suppliers and customers.Chapter 5,supply chain shared auditor and corporate tax avoidance.This chapter investigates the governance role of shared auditors in the supply chain from the perspective of corporate tax avoidance.On the one hand,shared auditors in supply chain possess superior knowledge of the supply-chain-specific tax-planning opportunities,leading to more aggressive tax activities of the supplier firms.On the other hand,the supply chain expertise may help the shared-auditors constrain clients' tax activities.Therefore,the relationship between supply chain shared auditors and corporate tax avoidance is an empirical question.Using a sample of Chinese A-share listed companies from 2007 to 2018,the results show that firms sharing auditors with customers may be less likely to engage in tax avoidance,indicating that shared auditors perceived higher audit risk due to the tax avoidance activities.In addition,such effects will be more pronounced when the revenue cycle for the supplier companies is more important and when firms employ big 10 auditors.Chapter 6 is supply chain shared auditors and inventory management efficiency.This chapter focuses on the governance role of the supply chain shared auditor from the perspective of corporate inventory efficiency.Alleviating information asymmetry and improving cooperation efficiency is the key to supply chain governance.When a firm and its customer share the same auditor,auditor improves the verifiability of private information and facilitates information flow,thereby alleviating the information asymmetry between the firm and its customer,and ultimately improving the firm's inventory efficiency.Using a sample of Chinese A-share listed companies from 2009 to 2018,this chapter investigates whether shared auditors in supply chain have implications for firm operations by examining the association between sharing auditors with customers and firms'inventory management.The results show that firms sharing auditors with customers have systematically higher inventory turnover ratios.Such effects will be more pronounced in firms with high demand uncertainty,serious information asymmetry in the supply chain and weak bargaining power.This chapter also finds significantly higher performance for firms sharing auditors with customers.Chapter 7 is conclusion and implication.This chapter reviews the conclusions and proposes implication for the firms,auditors and policy makers.In addition,this chapter analyzes the limitations of this study,and opens up new avenues for further research.This study contributes to the literature in three ways.First,this study adds to the research on supply chain audits.The literature generally focuses on supply chain audit quality.However,little is known about the real effects of supply chain audits.I extend the literature by exploring the governance role of supply chain audits on accounting information comparability,tax avoidance and inventory management efficiency.This study documents evidence consistent with supply chain auditors acting as governance role and influencing firms' decision.Second,this study contributes to the emerging literature on the auditor's information role.Auditors are usually regarded as assurance providers;however,they can also be viewed as a component of management's information environment and a potential information intermediary in some respects.Auditors have extensive knowledge about their clients' operations coupled with broad knowledge of the industries.Such knowledge can benefit clients not only by reducing their risk of audit failure but also through informational advantages if clients seek this additional resource.Recently,more and more scholars pay attention to the information role of auditors.Supply chain shared auditors obtain information about suppliers and customers at the same time,which is a natural setting for examining the intermediary role of auditors.This study explores the governance role of shared auditors in the supply chain from the perspective of inventory efficiency,and verifies the auditor's information intermediary function.Third,this study contributes to the supply chain literature that illustrates the importance of information sharing between supply chain partners.For example,the exchange of detailed customer demand and inventory information within the supply chain is associated with reduced supply chain costs and improved efficiency in the use of resources.This study enriches this literature by exploring how supplier companies benefit in terms of enhanced inventory efficiency when they purchase auditing services from the same audit firm with a major customer.