The communication between predecessor and successor auditors is of great importance in theory and practice, which aims to reduce information asymmetry and assist the successor auditors in identifying potential risks. Given that social connections based on homophily may further facilitate effective communication and knowledge sharing, would audit quality be further improved if the predecessor and successor auditors have a close relationship? It is still unknown. Accordingly, this study aims to examine how social connections between predecessor and successor auditors influence audit quality.
This study examines this question by using unique data manually collected from China. It empirically examines the impact of social connections between predecessor and successor auditors on audit quality, using a sample of Chinese A-share listed companies from 2013 to 2021.
Social connections between predecessor and successor auditors significantly reduce audit quality, with the underlying mechanism being the reduced audit effort. In addition, this study incorporates factors including mandatory auditor rotation, audit firm rotation, more detailed social connection measure and the persistence of social connection effect into our analysis. The study’s core conclusions remain robust to a battery of robustness checks. Notably, the negative effect of such social connection is more pronounced for important clients and firms located in provinces with a lower degree of regional marketization.
To the best of the authors’ knowledge, this study is the first to examine whether and how the social connection between predecessor and successor auditors on audit quality. The findings contribute to the literature by demonstrating the social connection effect in the culture in which connection (guanxi in Chinese) plays a central role.
