Political Turnover and Audit Opinion: Evidence from China

Abstract

SUMMARY In this study, we examine how political turnover influences auditor reporting behavior by focusing on the turnover of Chinese provincial governors. We predict that the Big 10 audit firms tend to report more conservatively to counter the uncertainties induced by governor turnover, whereas local small audit firms would report more aggressively to help governors conceal local negative information. Using 11,405 audits conducted in the Chinese economy, we find that the Big 10 audit firms report more Modified Audit Opinions (MAOs), whereas local small audit firms render more clean opinions in the pre-turnover than other nonturnover years. We also find that: (1) audit firms readjust their reporting behavior after governor turnover ends; and (2) governor turnover can be well anticipated one year ahead. Overall, our study suggests that political turnover wields a significant influence on auditor reporting behavior and this influence further varies across audit firms. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D72; M42; M38; M48.