The Effect of Auditor Morality on Professional Skepticism: Evidence from Individual-level Auditors in China

Abstract

Purpose – This paper investigates the effect of morality on professional skepticism for auditors, and whether this relationship is affected by audit firm reputation, client fraud risk, client importance, and audit firm tenure. Design/methodology/approach – We hand-collect data on philanthropic participation by auditors who signed audit reports for A-share listed companies in the Chinese Shanghai and Shenzhen Stock Markets from 2008 to 2018. We use regression models and propensity score matching to find whether audit morality is associated with professional skepticism. This study uses philanthropy to measure morality and uses the probability of issuing modified audit opinions as a proxy for professional skepticism. Findings – We find that auditors who participate in philanthropy have a higher degree of professional skepticism, indicating that auditor morality is significantly positively associated with their professional skepticism. This influence is present among high-reputation audit firms, less important and high-fraud-risk clients, and audit firms with long-standing clients. In addition, clients audited by auditors with higher morality have a lower probability of financial restatement and fraud. After using propensity score matching to solve the endogeneity problem, our conclusions remain valid. Practical implications – Our study provides strong evidence backing the necessity to encourage auditors to improve their moral standing through participation in philanthropy. Auditors involved in philanthropy are more likely to provide accurate and convincing audit reports with less risk of material misstatement, thus benefitting investment decisions. Originality/value – This paper contributes to the existing literature by providing the first empirical evidence that auditor philanthropic participation is benefit for increasing professional skepticism. Moreover, it put forwards a new perspective on morality evaluation not only for audit firms, but also for enterprise managers. Our evaluation system based on philanthropy may contribute to enhancing the personal morality of auditors, thus improving the external investment environment and avoiding financial fraud.