Corporate political connection disruption and audit pricing: Evidence from involuntary departure of politically connected independent directors in China under Rule 18

IF 3.3 Q1 BUSINESS, FINANCE

Journal of International Accounting Auditing and Taxation Pub Date : 2025-06-13 DOI:10.1016/j.intaccaudtax.2025.100709

Khalid Mehmood , Xuedan Tao , Huabing (Barbara) Wang , Wei Zhang

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引用次数: 0

Abstract

This paper examines how auditors respond to their client firm’s political connection disruptions in pricing decisions. Rule 18, released by the Chinese government in 2013, prohibits government officials from serving as corporate directors, leading to forced resignations of politically connected independent directors (PCIDs) in public corporations over subsequent years. Utilizing these involuntary departures as an exogenous shock to a firm’s political connection and adopting a propensity score matching and staggered differences in differences design, we document increased audit fees for firms with PCID resignations (treatment firms) relative to the control firms. This increase in audit fees is more pronounced in non-state-owned enterprises or firms with higher political rank PCID departures. In terms of the mechanism, we do not find support for a higher client misreporting risk since treatment firms experience improved financial reporting quality. Instead, we document a significant increase in the probability of financial reporting related government sanctions and corporate lawsuits for these firms, suggesting increased litigation exposures as a potential driver for the audit fee increases. Overall, our results indicate a decreasing effect of client political connections on audit pricing.

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公司政治关系中断与审计定价：基于规则18下中国政治关系独立董事非自愿离职的证据

本文考察了审计师如何应对其客户公司在定价决策中的政治关系中断。中国政府于2013年发布的第18条规定，禁止政府官员担任公司董事，导致上市公司中有政治关系的独立董事（pcid）在随后的几年里被迫辞职。利用这些非自愿离职作为公司政治关系的外生冲击，并采用倾向得分匹配和差异设计中的交错差异，我们记录了与控制公司相比，有PCID辞职的公司（处理公司）的审计费用增加。这种审计费用的增加在非国有企业或政治级别较高的PCID离职的公司中更为明显。就机制而言，我们没有发现支持更高的客户误报风险，因为治疗公司的财务报告质量得到了改善。相反，我们记录了这些公司与财务报告相关的政府制裁和公司诉讼的可能性显著增加，这表明诉讼风险增加是审计费用增加的潜在驱动因素。总体而言，我们的研究结果表明，客户政治关系对审计定价的影响正在减弱。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

Journal of International Accounting Auditing and Taxation BUSINESS, FINANCE-

CiteScore

4.50

自引率

3.80%

发文量

期刊介绍： The Journal of International Accounting, Auditing and Taxation publishes articles which deal with most areas of international accounting including auditing, taxation and management accounting. The journal''s goal is to bridge the gap between academic researchers and practitioners by publishing papers that are relevant to the development of the field of accounting. Submissions are expected to make a contribution to the accounting literature, including as appropriate the international accounting literature typically found in JIAAT and other primary US-based international accounting journals as well as in leading European accounting journals. Applied research findings, critiques of current accounting practices and the measurement of their effects on business decisions, general purpose solutions to problems through models, and essays on world affairs which affect accounting practice are all within the scope of the journal.