The impact of institutional environment on auditor reporting: evidence from China's anti-corruption campaign

Abstract

PurposeThe purpose of this study is to examine whether the institutional environment influences auditor reporting.Design/methodology/approachThis study employs China's anti-corruption campaign as an exogenous shock to its institutional environment and compares auditors' issuance of modified audit opinions (MAOs) to small-profit clients before and during the campaign.FindingsThis study documents that small-profit clients were more likely to receive MAOs during the anti-corruption campaign period than before, indicating that auditors issued more conservative audit opinions to small-profit clients because of the anti-corruption campaign. Additionally, this study finds that increased auditor conservatism was more pronounced for auditors of large clients.Practical implicationsThis study suggests that a weak institutional environment adversely affects auditor conservatism. This offers valuable insights for governments and regulators to improve the audit environment and for audit firms to enhance auditors' integrity and independence.Originality/valueThis study contributes to the research on institutional environments and auditing by observing a unique exogenous event.