Organizational Resilience of Audit Firms - Evidence from the Outbreak of COVID-19

Abstract

This paper examines the organizational resilience of audit firms during the outbreak of the COVID-19 pandemic. The unexpected restrictions to travelling and on-site working imposed unanticipated barriers for auditors in Hong Kong. Management research suggests that companies with more organizational resilience can respond to and learn from unexpected situations and resume expected performance levels or even create new opportunities. Using a sample of firms listed on the Hong Kong Stock Exchange (HKEX), we examine auditor-client characteristics contributing to organizational resilience. Firstly, our full-sample results suggest that larger auditors, industry specialists and auditors with closer relationships to clients have more timely audit reports during the COVID-19 outbreak. Second, analyzing a subsample of companies that initially had to publish unaudited financial statements, we find evidence that industry expertise and longer auditor-client relationship significantly reduced the need for year-end audit adjustments. These findings provide unique evidence of audit firm characteristics associated with capacity for organizational resilience and maintaining expected performance levels. Moreover, examining auditor resignations we find that larger auditors were more likely to offload clients, whereas industry specialists were more likely to keep the clients that operate within their specialization. Finally, we do not find any evidence that investors would price having more resilient auditors. To conclude, our findings indicate that during the unexpected outbreak of the COVID-19 pandemic larger auditors, industry specialists, and auditors with closer ties to the clients, exhibit higher levels of resilience and are able maintain the expected performance levels.