Accounting Firm Organization Structure and Audit Risk Management: Evidence from Chinese Domestic Accounting Firms

Abstract

ABSTRACT Accounting firms play an important role in improving the quality of accounting information and reducing information symmetry risk in capital markets. In this paper, we argue that organizational structure and relevant internal management can affect audit quality and audit risks. We identify three main types of structure in accounting firms: mango-type structure (completely centralized control), banana-type structure (completely decentralized control), and olive-type structure (moderately decentralized control). We manually collect the organizational structure information of domestic accounting firms in China from 2013 to 2019. We find that olive-type firms can manage audit risks in a better manner, as such firms are more likely to issue nonstandard audit opinions and charge higher audit fees based on client audit risks. Our findings would contribute to audit culture and climate literature regarding what changes in control climate can be implemented to influence auditor behavior and improve audit quality. Data Availability: Data are collected from public sources and websites of accounting firms. JEL Classifications: M42; M48; L22; G32; G34.