Client Following Former Audit Partners and Audit Quality: Evidence from Unforced Audit Firm Changes in China

Abstract

In China's audit market, audit clients occasionally follow an audit partner who moves to another audit firm in an unforced setting (i.e., not due to the predecessor audit firm suffering regulatory sanctions). By examining a sample of Chinese listed companies during 2001–2013, we find that turnover audit partners are significantly less likely to issue a modified audit report to their unforced follower clients, as compared either with all other audits in the same successor audit firm in the same year, or with post-follow audits of forced follower clients (where the predecessor audit firm suffers regulatory sanctions). We also document evidence of turnover partners treating unforced follower clients favorably prior to the partner turnover event. Our evidence suggests that a close audit partner–client bonding impairs audit quality when lacking regulatory and public attention, and has implications for regulators, investors, and audit firms' quality control in emerging markets where clients are usually closely tied to audit partners rather than to the audit firm, and where a non-compete agreement between an audit partner and the audit firm is unavailable or weakly enforced.