Controlling Shareholders and Audit Quality

Abstract

High ownership concentration is a feature of publicly listed companies in Taiwan. Through concentrated ownership, major decision rights remain in the hands of controlling shareholders, thus, external auditors perform an important monitoring role in publicly listed companies. However, auditing activities of auditors may be under the pressure from clients, because accounting firms, as profit-making enterprises, need to maintain their clients. This paper examines the association between controlling shareholders and audit quality using a sample from Taiwanese companies listed on the Taiwan Stock Exchange or GreTai Securities Market from 1996 to 2008. According to prior studies, the measure of audit quality is just beating (missing) earnings benchmarks. The empirical research finds that the greater board seat rights and divergence level between the board seat rights and cash flow rights, the more (less) likely the companies avoid reporting a loss and the lower (higher) audit quality is; the greater cash flow rights and board seat rights, the more (less) likely the companies avoid reporting a small decreases in earnings and the lower (higher) audit quality is. The conflicting evidence suggests that the controlling shareholders have ability and are more likely to affect audit quality in key moments.