Family control, auditor independence, and audit quality: Empirical evidence from the TSE-listed firms (1999-2002)

Abstract

he present study posits that auditors have weaker bargaining power when facing clients with ultimately controlling family members as opposed to clients without. By analyzing clients’ magnitude of discretionary accruals in company with audit reports, the present study examines empirically the influence of family-controlled clients on the audit quality. The empirical results, as expected, reveal that the magnitude of discretionary accruals of a family-controlled firm, given receiving a standard unqualified audit report, is significantly larger than a firm that has no ultimately controlling family members. Moreover, family-controlled firms with larger positive discretionary accruals, as expected, are more likely to receive a standard unqualified audit report than clients without ultimately controlling shareholders. The above empirical results suggest that the audit quality is indeed deteriorated when an auditor faces a family-controlled client.