A political-economic analysis of auditor reporting and auditor switches

Abstract

This study examines whether auditor opinions are affected by political and economic influences from governments. We use auditor locality (local versus non-local) to capture such influences from local governments in China. Based on data from China’s stock markets for the period 1996–2002, we find that <i>local</i> auditors, who have greater economic dependence on local clients and are subject to more political influence from local governments than non-local auditors, are inclined to report favorably on local government-owned companies to mitigate probable economic losses. Moreover, companies with qualified opinions are more likely to switch from a non-local auditor to a local auditor than companies with unqualified opinions. Contrary to some prior studies, we find that in China’s political environment, local government-owned companies that switched from a non-local auditor to a local auditor after receiving a qualified opinion can succeed in opinion shopping.