Political Connection and the Demand for Industry Specialist Auditors

Abstract

Prior literature suggests that political connected firms are more likely to be associated with lower financial reporting quality than non-political connected firms. Industry specialist auditors have a higher reputation to provide high quality audit. Thus, I hypothesize that political connected firms have a higher demand for industry specialists in order to minimize the agency costs associated with political connection. Consistent with my prediction, I find a significant positive association between political connection and the demand for industry specialist auditors. Additional analyses indicate that client firms with political connect firms and firms with industry specialists are less likely to switch auditors. Moreover, for client firms that do switch auditors, I find that higher propensity for political connected firms to engage in upward and lateral switches than non-political connected firms. This study furthers our understanding on the impact of political connection on auditor choice in a U.S. setting.