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Staying or switching: How companies react to audit firm penalties
International Review of Economics & Finance, Volume: 104, Start page: 104639
Swansea University Author:
Pengfei Gao
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© 2025 Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license.
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DOI (Published version): 10.1016/j.iref.2025.104639
Abstract
We investigate the relationship between corporate governance characteristics and the change ofpenalized audit firms based on financing, reputation, and client relationship perspectives. Basedon a sample of client companies of penalized audit firms in China between 2008 and 2023, wefind that companie...
| Published in: | International Review of Economics & Finance |
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| ISSN: | 1059-0560 |
| Published: |
Elsevier BV
2025
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| Online Access: |
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| URI: | https://cronfa.swan.ac.uk/Record/cronfa70462 |
| Abstract: |
We investigate the relationship between corporate governance characteristics and the change ofpenalized audit firms based on financing, reputation, and client relationship perspectives. Basedon a sample of client companies of penalized audit firms in China between 2008 and 2023, wefind that companies with financing incentives and good reputations tend to change penalizedaudit firms, while companies with close “audit firm-client” relationships tend to maintaincooperation. The above conclusion still stands after a series of endogeneity and robustness tests.Heterogeneity tests indicate that the intensity of the China Securities Regulatory Commission(CSRC)’s penalties, the company’s level of real earnings management, and the nature of propertyrights all affect the company’s decision to change the penalized audit firm. Further research findsthat the company’s continued cooperation with the penalized audit firm can harm its accountinginformation quality and accounting conservatism. The findings of our study enrich the existingresearch on the factors influencing the change of penalized audit firms in emerging markets. |
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| Keywords: |
Audit firm change; Administrative penalty; Financing constraints; Corporate reputation; Client relationship |
| College: |
Faculty of Humanities and Social Sciences |
| Funders: |
Kexin Zhang acknowledges the financial support from Xinjiang Tianchi Talents Young Doctoral Program (Xin HRSSDL[2024] No. 104). |
| Start Page: |
104639 |