tailieunhanh - Related party transactions and opinion shopping

This paper examines the association between related party transactions (RPTs) and partner-level audit opinion shopping. The use of RPTs, generally diverse and complex, associates with an increased audit risk and the probability of receiving modified audit opinions (MAOs). In China, the audit market is dispersed and audit firms’ internal control mechanisms are weak. This enables firms to shop for a more lenient audit partner within the same audit firm to obtain a favorable opinion. I argue that firms with more RPTs have greater incentives to press audit firms to switch engagement partners to obtain more favorable opinions. Based on a large sample of Chinese listed firms, I find that successful partner-level opinion shopping increases as the amounts of RPTs rises. I also find that the positive relationship between RPTs and successful opinion shopping is more pronounced in non-operating RPTs. Policymakers may consider RPTs to have a significant effect on auditor independence and design monitoring mechanisms to prevent partner-level opinion shopping. | Journal of Applied Finance Banking vol. 10 no. 1 2020 173-202 ISSN 1792-6580 print version 1792-6599 online Scientific Press International Limited Related Party Transactions and Opinion Shopping Guang-Zheng Chen1 Abstract This paper examines the association between related party transactions RPTs and partner-level audit opinion shopping. The use of RPTs generally diverse and complex associates with an increased audit risk and the probability of receiving modified audit opinions MAOs . In China the audit market is dispersed and audit firms internal control mechanisms are weak. This enables firms to shop for a more lenient audit partner within the same audit firm to obtain a favorable opinion. I argue that firms with more RPTs have greater incentives to press audit firms to switch engagement partners to obtain more favorable opinions. Based on a large sample of Chinese listed firms I find that successful partner-level opinion shopping increases as the amounts of RPTs rises. I also find that the positive relationship between RPTs and successful opinion shopping is more pronounced in non-operating RPTs. Policymakers may consider RPTs to have a significant effect on auditor independence and design monitoring mechanisms to prevent partner-level opinion shopping. JEL classification numbers G34 M42 Keywords Opinion shopping Partner switch Audit quality Related party transactions 1. Introduction Related party transactions RPTs involve a company transacting with its related entities . subsidiaries affiliates principal owners directors or officers . Companies often use RPTs as a mechanism for financial fraud and for minority shareholder expropriation despite its potential to support genuine business 1 Department of Accounting Feng Chia University. Article Info Received September 14 2019. Revised September 27 2019. Published online January 5 2020. 174 Guang-Zheng Chen transactions Kohlbeck and Mayhew 2010 Ryngaert and Thomas 2012 . Auditors play an essential role in the .