| As the auditing literature shifts toward more disaggregated analyses,academic research conducted on the individual auditor level has witnessed a boom.Some researchers have examined effects of auditors’ personal characteristics on audit quality,such as age,gender,educational background,industry expertise and so on,while other researchers have explored several settings in which audit quality could be compromised by auditors’ close relationships with their clients.There are mainly four specific settings in which close auditor-client relationships are exhibited,those are auditors’ long audit tenure,auditor-client professional affiliation,auditors rotated back onto engagements and client following turnover auditors.With tidal waves of mergers between audit firms promoted by external policies in recent years,the turnover rate of auditors has largely increased in China and the unique phenomenon of turnover auditors taking some clients with him or her to the new audit firm has attracted our attention.This phenomenon implies a bonding between auditors and their clients,which might compromise audit quality.However,studies on this unique phenomenon are limited.Therefore,based on the unique setting in which turnover auditors take their clients with them to the new audit firm,we try to explore the existence and closeness of relationships between auditors and their clients and further effects on audit quality.We identify the phenomenon of clients following turnover auditors from which we can observe at least one auditor signing on audit reports for the same listed company but on behalf of two different audit firms and define this phenomenon as the existence of auditor-client personal relationship.Then we divide clients that have changed audit firms into two groups,one with personal relationship and the other not.Next,we use Audit Independence Theory,Relationship Marketing Theory and Asset Specificity Theory to analyze the motivation and potential economic outcomes of auditor-client personal relationships under Chinese institutional background.Using data during the 2005-2015 period from China and the absolute value of discretional accruals estimated from two kinds of Jones model to measure audit quality,we examine the effects of auditor-client relationship on audit quality through the unique setting of clients following turnover auditors.We find that:(1)earnings management is higher when the client has a personal relationship with the auditor,which suggests that turnover auditors treat their follower clients more leniently and audit quality is compromised,(2)in the personal relationship subsample,clients’ absolute discretional accruals increase significantly as auditor tenure increases,which indicates the closeness of auditor-client relationship.At last,we make several suggestions from the perspective of listed firms,audit firms and regulation authorities,hoping to attribute to the healthier development of China’s audit market and the protection of investors. |
