Is audit firms' social performance associated with audit firm reputation? Evidence from China

Abstract

We use the data of Chinese audit firms' philanthropic activities to examine the effect of such activities on audit firms' financial performance, audit quality and auditor retention. We find that audit firms with more socially responsible activities in the prior year earn more total revenues, revenue per partner or shareholder and revenue per accountant in the current year. Besides, clients audited by socially responsible audit firms have higher audit quality and report lower income‐increasing accruals, higher income‐decreasing accruals, fewer below‐the‐line items and less frequent small positive earnings. More interestingly, clients with socially responsible audit firms have fewer auditor changes.