Do auditors value social trust? Evidence from China

Abstract

ABSTRACT Using a sample of Chinese listed companies between 2007 and 2021, we investigate the association between social trust and audit outcomes. Results suggest that regional level of social trust can improve audit efficiency and reduce audit fees. We further find client firms reside in high-trust regions are less likely to engage with Big10 auditors in China. Both audit efficiency and auditor choice play partial mediating roles in lowering audit fees. The negative effect of social trust on audit fees is more pronounced in firms located in strong legal enforcement region, with state ownership, or in firms audited by non-Big10 auditors. By documenting the reduced audit fees and the lower likelihood of hiring Big10 auditors do not lead to deterioration in audit quality, our study has important social and policy implications for strengthening informal norms in regions with low social trust.