Topic:Does corporate governance complement or substitute for external auditing? Evidence from the recent anti-corruption campaign in China

Speaker: Professor Gary Tian, Macquarie University

Host: LIU Qigui

Time: 13:00-14:30 June 24th, 2016 (Friday)

Venue: Room 702

Abstract:  In this paper we use the differenceindifference method to capture the effect of the exogenous shock of the recent anticorruption campaign on internal corporate governance and external auditing. We find that compared with nonSOEs, the anticorruption campaign reduced executive perquisites(perks) and related party transactions in SOEs, as well as mitigating deficiencies in their internal control, indicating that the campaign improved their internal corporate governance. We further find that, after the anticorruption campaign, SOEs were less likely to choose one of the Big 10 auditors, while auditing firms assigned less experienced auditors to their SOE client firms and charged lower audit fees. Further findings indicate that the effect of the campaign on auditor choice and audit fees is more pronounced in the firms which showed a greater improvement in their corporate governance. Finally, we find that accounting information quality and the probability of issuing erroneous auditing opinions did not differ significantly after the campaign, suggesting that the improvement in internal governance caused by the anticorruption campaign substituted for the quality of external auditing. Overall we argue that, because SOEs have natural political connections with the government for their access to capital markets and only need to meet minimum regulatory requirement, they have less incentive to provide highquality accounting information. Since the demand for information quality remain unchanged after the campaign, internal governance and external auditing quality, as two of the channels for improving information quality, substitute for each other: when internal governance improved after the anticorruption campaign, SOEs tended to recruit a lowerquality auditors and pay lower fees than before. We argue that marketoriented economic reforms need to be deepened before the benefits from the recent anticorruption campaign will be realized.