Do Political Connections Help or Harm Family Firms? An Audit Pricing Perspective

Abstract

Past business ethics research highlights negative perceptions about corporate governance of family firms, and yet many auditors evaluate family businesses favorably and charge them lower audit fees; however, this inconsistency remains unexplained. Moreover, the impact of family firms’ political connections and board gender diversity on audit fees is still not clear. Based on the data from listed Chinese family firms, we address these important research gaps by using the local institutional environment in which the client operates as a moderator of the process by which auditors assess the implications of clients’ political connections. Political connections reduce audit fees when a client is located in a region with high-quality public administration. Female representation in audit committees positively moderates the relationship between political connections and audit fees, as female committee members react to their firms’ political connections by demanding higher levels of assurance from auditors. Female committee members also demand higher audit efforts for family firms managed by non–family-member CEOs.