Auditor Independence and Audit Quality: An Empirical Study on Joint Switches of CPA Firms and Clients in the Chinese Market

Recent accounting scandals across the world have raised public concerns about auditor independence. As auditor independence is unobservable, researchers have to identify scenarios in which independence is likely to be damaged to study whether reduced auditor independence leads to poor audit quality. This study explores a possible impairment of auditor independence in which the partner who is in charge of an engagement switches to another CPA firm and takes the client with him/her to the new firm. This institutional setting of joint switches makes it possible for us to examine the following research questions:Do auditors compromise their audit quality to please clients before joint switches?Are the companies and CPA firms that are involved in joint switches systematically different from others in terms of corporate governance and financial performance and conditions?Are financial reports that are audited by joint switch firms of lower quality and less likely to be qualified when other factors are controlled for?This study is expected to provide direct evidence on the association between auditor impendence and audit quality, and between clients’ corporate governance and auditor independence, thus making a valuable contribution to auditing literature.