Client concerns about information spillovers from sharing audit partners

Kang, Jung Koo; Lennox, Clive S.; Pandey, Vivek

doi:10.1016/j.jacceco.2021.101434

Cited by 18 publications

(3 citation statements)

References 29 publications

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“…Moreover, auditors have been sanctioned for leaking proprietary information to outside parties (SEC 2014). Both Aobdia (2015) and Kang et al (2022) document client concerns that proprietary information could leak to competitors if they share the same auditor. Furthermore, auditors connected to a larger number of companies also have a larger market share, and auditors may take advantage of their position to extract rents through their pricing power (Bianchi, Carrera, et al 2019).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Francis and Michas (2013) find that bad audit practices spread between auditors located in the same audit office. Aobdia (2015) and Kang et al (2022) document client concerns about leaking proprietary information to rival firms through a shared auditor. Second, studies examining social ties among managers, directors, and auditors document that social ties create “bonds” which reduce director and auditor independence (Hwang and Kim 2009; Fracassi and Tate 2012; Bruynseels and Cardinaels 2014; Khanna et al 2015; Lennox 2005; Guan et al 2016; He et al 2017).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Financial Reporting Quality and Auditor Dismissal Decisions at Companies with Common Directors and Auditors*

Fan

Gunn

et al. 2022

Contemporary Accting Res

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We examine the effects of corporate networks involving common directors and auditors (i.e., connections creating single or double ties between companies) on two important monitoring roles: financial reporting quality and auditor dismissal decisions. We also investigate how shocks to the networks, in the form of the audit failing to detect misstatements, affect these networks' structure. The investigations are important because these networks can have significant effects on firm governance and may have different effects when they overlap. We have three primary findings about double‐tie networks: (i) there is no evidence that they improve overall financial reporting quality beyond the effect of single‐tie networks; (ii) they lower directors' willingness to dismiss the auditor, even when there is a signal of an audit failure within the network; and (iii) they allow audit‐quality problems to spread between companies. Our results demonstrate the importance of investigating multiple types of networks and how shocks travel through them. Our findings also lend credence to concerns that “cozy” relationships between directors and auditors diminish the link between poor audit quality and market‐imposed reputation penalties—specifically, auditor dismissals.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Financial Reporting Quality and Auditor Dismissal Decisions at Companies with Common Directors and Auditors*

Fan

Gunn

et al. 2022

Contemporary Accting Res

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“…[2016, p. 51] attribute their evidence to: “…auditors frequently [violating] their duty to put the interests of their clients ahead of their own in what appears to be a failure to protect confidential client information.” Bills et al. [2020] provide survey and archival evidence implying that U.S. companies routinely avoid appointing their competitors’ auditor in order to prevent sensitive information from leaking; Kang, Lennox, and Pandey [2020] report corroborating results at the partner level. This reinforces Aobdia's [2015] evidence from analyzing three quasi‐natural experiments that auditor choice reflects that firms focus intently on constraining propriety information loss through this channel.…”

Section: Introductionmentioning

confidence: 99%

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

Chen

Huang

et al. 2021

J of Accounting Research

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We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross‐sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.

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