Who affects whom? : impact of the national culture of international audit firms and their affiliates on the financial reporting quality of audit clients

This paper examines whether the financial reporting quality of audit clients is affected more by the national culture of the home country of an international parent audit firm or the national culture of its affiliates' host country. The study uses 111,949 firm-year observations for 16,444 unique industrial firms across 51 countries from 2009 to 2019. Financial reporting quality is proxied by accrual-based earnings management. The national culture of the countries in which the parent firm's head office and foreign affiliates are located is represented by the Hofstede Model of Cultural Dimensions. The results demonstrate that the national culture of parent firm's home country has a more significant impact on earnings management than the national culture of the foreign affiliates' country. Findings also support the homogeneity hypothesis on the association between international parent firms and their affiliates. The global audit network, which is dominated by this international parent firm, has common cultural characteristics. The results remain unchanged after the different home country assumptions, alternative sampling procedures, endogeneity, and firm- and country-level factors are controlled.