The determinants of auditor switching from the perspective of corporate governance in China

Abstract

Abstract This paper reports the association between firms' internal corporate governance mechanisms and their auditor switch decisions in the Chinese context. We identify two types of auditor switch, namely switching to a larger auditor and switching to a smaller auditor. Three variables are used to proxy for firms' internal corporate governance mechanism, including the ownership concentration (shareholding by the largest owner), the effectiveness of supervisory board (SB), and the duality of chairman of board of directors (CBoD) and CEO. We regressed the internal corporate governance variables over firms' audit switching types during a specific period of 2001–2004 when a bear market continued in China. The empirical results demonstrate that firms with larger controlling owners or in which CBoD and CEO are held by the same person are more likely to switch to a smaller auditor rather than to a larger one. However, the effect of the SB variable does not have a significant impact on auditor switching decisions. In general, the study findings suggest that firms with weak internal corporate governance mechanism tend to switch to smaller or more pliable auditors in order to sustain the opaqueness gains derived from weak corporate governance. On the other hand, with the improvement of corporate government, firms should be more likely to choose large (high-quality) auditors in making auditor switching decisions.