Does internal corporate governance complement or substitute for external auditing? Evidence from China's anti-corruption campaign

Qinglu Jin, Yuchao Jin, Gary Gang Tian, Yang Xuan

Research output: Contribution to journalArticlepeer-review

Abstract

Two competing hypotheses have been developed for the relationship between internal corporate governance and external auditing. One proposes a complementary relationship, while the other suggests it is substitutable. This study takes advantage of China's recent anti‐corruption campaign as a quasi‐natural experiment to explore this relationship. Using a difference‐in‐differences approach, we find that, after the campaign, internal corporate governance improved more in SOEs (state‐owned enterprises) than in non‐SOEs. SOEs were less likely to choose Big 10 auditors after the campaign, while audit firms assigned less experienced auditors to their SOE client firms and charged lower audit fees. These effects were more pronounced in SOEs that exhibited greater improvement in corporate governance. Overall, we find the anti‐corruption campaign improved corporate governance in SOEs but, at the same time, reduced external audit quality, which supports the substitution view. We argue that this result might be driven by the fact that SOEs have limited demand for high‐quality accounting information because the Chinese government maintains strong control over the capital markets.
Original languageEnglish
Pages (from-to)153-182
Number of pages30
JournalAbacus
Volume57
Issue number1
DOIs
Publication statusPublished - Mar 2021

Keywords

  • Accounting quality
  • Anti-corruption
  • Difference-in-differences
  • External auditing
  • Internal governance
  • State-owned enterprises

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