Research Insights

Shall we uphold our auditing standards when serving important clients?

By Dr. Gaoguang Zhou

Auditors are crucial to corporate governance and financial market as they could independently monitor firms’ financial statements and reduce information asymmetry. However, auditors are likely to be tempted to lower their auditing standards in facing financially important clients. Such concerns have triggered regulatory initiatives globally, particularly after several scandals such as Enron. In the study, we examine this issue based on a large sample from 33 countries. Our findings show that, auditors are more likely to uphold auditing standards by issuing modified opinions to their economically important clients relative to other clients. Furthermore, we find that this is more likely to occur (1) for Big N auditors as they have more reputation loss in the events of audit failure than non-Big N auditors, (2) for multinational audit clients to avoid reputation loss due to the complexity and visibility of MNCs, and (3) in stronger enforcement countries where auditors’ misconducts are more likely to be detected and punished. The findings reveal how auditors strategically prioritise reputation over economic profits in the international setting, providing implications for auditing regulators and practitioners. In addition, other international professional service providers may benefit from our study in dealing with similar ethical dilemma.

Reference:

Fung, S.Y.K., Zhou, G.S. and Zhu, X.K., 2016. Monitor objectivity with important clients: Evidence from auditor opinions around the world. Journal of International Business Studies, 47(3), pp.263-294.