State Ownership, Political Influence and Audit Reporting: Evidence from Key Audit Matters

Abstract

We examine whether political forces in Chinese State-Owned Enterprises (SOEs) influence audit reporting, and in particular the disclosure of Key Audit Matters (KAMs). We test two competing predictions that offer alternative explanations on the relation between SOEs and KAM disclosures. Using a sample of Chinese listed firms over 2016 - 2019, we document that SOEs have fewer KAMs in their auditor reports. This observation is likely to be explained by politicians’ and affiliated SOEs’ propensity to avoid bad news; as well as by SOEs’ incentives to collude with auditors and SOEs’ ability to coerce auditors. Further, we show that the aforementioned effect is more pronounced when SOEs have a politically connected Chairman, less independent auditors, and more concentrated ownership; as well as when SOEs engage in tunneling and propping related-party transactions. These findings reinforce our primary inference regarding the political influence of SOEs on KAMs disclosure. Overall, our study provides evidence on how political institutions may affect audit practices.