The Internal Circle Effect And Auditing Behavior Of Accounting Firms

Accounting firms can provide independent assurance services,increase the credibility of accounting information,and then improve the efficiency of resource allocation and contracting,which is an important guarantee for the effective operation of the capital market.In recent years,business activities and accounting standards have become increasingly complex.At the same time,the government has been continuously implementing policies to decentralization in the economy,and the government has gradually withdrawn.These have made the role of auditing in the capital market increasingly prominent.However,the challenges that China faced with in the development of audit market have also increased,and the investors still has significant concerns about the audit quality of accounting firms.To address investors' concerns,regulators have gradually strengthened supervision and punishment of the accounting firms,but governments' measures doesn't address the concerns thoroughly,and accounting firms still have many problems and challenges.It can be seen that,in order to improve audit quality,in addition to increasing external supervision,it is more important to study the internal structure of the accounting firm,truly understand the audit process and audit behavior,and fundamentally solve various problems in accounting firms.Extant literature has investigated the impact of external factors on accounting firms,and some literature considers it as a black box,such as focusing on the impact of the size,tenure,industry expertise,and organizational form on audit behavior,or examined the impact of auditors' personal style,experience,gender,expertise,education,and other factors on auditing behavior.However,the studies on accounting firms' inner structure and networks is still not enough,most part the studies are on inner structure,and the influence of internal networks on auditing behavior is underresearched.The personnel in the accounting firm is the most important factor that affects the quality of the audit,and there are many interactions between auditors such as cooperation,supervision,and profit sharing.Therefore,the influence of audit firms' internal networks on the auditor is more complicated and important than that of the general organization.Although the existing literature involves the social networks of auditors,it mainly examines the relationship between auditors and external persons from the perspective of independence,like clients' executives,and does not study the internal social networks of the firm.In general,research on how people in different levels of the firm affect auditors(this article defines them as an internal hierarchical circle effect)is still scarce.Specifically,first,at the firm level,the management style of the accounting firm will be affected by the partner management committee,the chief partner,and other managers;secondly,at the office level,the office's leader will have an impact on the behavior of auditors in that office;again,at the team level,other members of the team will also impact the auditor's behavior during the cooperation process.Based on this,this article focuses on the influence of personnel in different circles within the firm on audit behavior,and conducts the research from firm level to office level and team level,that is,the influence of all three levels of the hierarchical circle effect on audit behavior.At the firm level,the localization of accounting firms provides a good setting for the research of the firm-level hierarchical circle effect,because the partner management committee and partners have undergone significant personnel changes during the localization process,and the chief partners have also changed.The localization policy is exogenous to some extent,which may alleviate possible endogenous problems.Therefore,this article analyzes the accounting circle effect from the perspective of the impact of the localization of accounting firm personnel on auditing behavior.The research results show that the localization of accounting firms improves audit quality,and the greater the degree of localization,the greater the improvement in audit quality.This effect is more pronounced in samples with worse information environments,more relational transactions,and more related party transactions.Further research shows that localization of accounting firms also reduces audit fees.At the office level,the hierarchical circle effect focuses on the influence managers in office on auditors' behavior.The unique data of the head of the office provides research opportunities for this question.This article analyzes the office-level hierarchical circle effect from the perspective of the office's leader audit style affecting the subordinate's audit style.Specifically,this paper measures the auditing style by using aggressiveness,and examines the influence of the auditing style of the head of the office on the auditing style of her/his subordinates.The research results show that the aggressiveness of the head of the office will have a significant impact on the aggressiveness of the subordinate auditors,that is,the audit style of the office leader has an impact on the audit style of the subordinates.And this effect is more pronounced in small offices,areas with low marketization or more government intervention,male leaders,and leaders with accounting major.At the team level,the team-level hierarchical circle effect studies the impact of core team members on the auditor's auditing behavior.The mandatory disclosure of the name of the signing auditor in China's audit report provides data to the research of this question.Unlike managers' focus on management activities,team-level auditors are more involved in specific audit work,and the knowledge and skills are important factors that affect their performance.Therefore,this article analyzes the team-level hierarchical circle effect from the perspective of teamwork-based knowledge transfer affecting auditors' behavior.Specifically,based on networks formed by co-signing in an audit reports,this article explores the impact of the social distance between auditors and industry experts on their auditing behavior.The research results show that the social distance between auditors and industry experts is positively related to audit quality,and this result is still significant after controlling the fixed effects of individual auditors.In addition,this effect is stronger in samples with non-Big4,poor information environments and higher business complexity.Further,the timing of audit quality improvement analysis also shows that the audit quality has improved significantly after relationships with industry experts established.This research has both theoretical contribution and practical significance.In terms of theoretical contributions,first,based on the Chinese scenario,the paper studies “hierarchical circle effect” for the first time,and a systematic study is carried out.Existing research on accounting firms mainly focuses on the external factors and its own characteristics,or individual auditors,but not on the influence of personnel in the firm's internal networks on auditors' behavior.However,against the backdrop of China's prevailing relational-based transactions,internal personnel interactions are very common and will inevitably have a significant impact on audit behavior.This paper finds that people in different levels of the firm have a significant impact on auditing behavior,further opening up the black box of audit firm and deepening the research on the interior of the accounting firm.Second,this paper fills in the blank of the impact of the localization of accounting firms on auditing behavior.The localization of accounting firms is an event that has an important impact on the Chinese auditing market,and this paper provides more insights on the economic consequence of accounting firms' localization.Third,existing literature pay little attention to the impact of the important factors such as the head of the accounting firm office on the subordinate auditors.This article expands extant literature on the factors affecting audit behaviors,that is,the auditor's behavior is not only affected by the client,but also by the organization and its internal circle,which enriches the literature on the factors affecting audit behavior.In addition,this article expands the research of industry expertise from the perspective of teamwork and deepens the research of industry expertise.Finally,this article extends the research on auditor knowledge acquisition from the perspective of industry expertise acquisition.In terms of practical significance,first of all,research on the internal hierarchical circle effect of accounting firms shows the importance of circles to auditors,and provides some empirical evidence for the accounting firm on how to improve audit quality and enhance the auditor's ability from the inside.Secondly,the research on the localization of accounting firms can provide references for accounting firms' the international business development and Chinese accounting firms' internationalization.Furthermore,research on the branch office of accounting firm shows that the choice of the person in charge of the office will have a great impact on the audit quality of the office,which is of significance for the management of the office.Finally,research on team-level knowledge transfer shows that working with industry experts is an important way to gain industry expertise,which suggests that in addition to providing more training for auditors,accounting firms need to promote knowledge sharing among auditors.For auditors,to gain more knowledge,they can cooperate or communicate with auditors with more industry expertise.In short,the impact of the accounting firm's hierarchical circle effect on audit behavior found in this paper can provide reference for the improvement of the human capital of the accounting firm,the management of the branch office,and the improvement of the auditor's knowledge.