Auditor-client bonding and audit quality: partner-level evidence

In this study, we argue that an increased economic bonding may develop between an audit partner and the clients when the auditor switches to a new audit firm because the auditor’s incremental payoff expected from switching to the new firm (e.g., promotion, larger share of firm profits, more perks, and more authority and peer respect) is often enhanced by the number of clients he can bring to the new firm. The auditor and the client can use audit quality as a bargaining tool to divide the incremental payoff generated from the joint auditor-client switch. We thus hypothesize that the turnover audit partners treat follower clients more favorably (by making less downward audit adjustments to pre-audit earnings or allowing greater discretionary accruals) than they treat other clients around the joint auditor-client switches. Using the data in China where engagement-specific audit partner information is available, we find evidence that supports our hypothesis under the condition that both of the signing auditors for the follower client switch to the same successor firm (or come from the same predecessor firm). Our partner-level evidence is consistent with the widespread concern that audit quality is lower when there is a greater level of auditor-client economic bonding.