Secrecy culture, client importance, and auditor reporting behavior: an international study

Abstract

Purpose

This study aims to investigate whether auditors compromise their independence for economically important clients in countries with a secrecy culture.

Design/methodology/approach

The authors empirically examine the research question based on a data set of 33 countries for the period from 1995 to 2018. The dependent variable is the auditors’ propensity to issue modified audit opinions, which is a proxy for auditor independence. The authors use relative client size as a proxy for client importance. The authors adopt the Heckman (1979) two-stage model to mitigate the potential endogeneity issue involved in the selection of Big-N auditors.

Findings

Using a large sample of firms and controlling for the firm- and country/region-level factors, this study reveals that both Big-N and non-Big-N auditors are more likely to issue modified audit opinions to clients located in countries with a strong secrecy culture relative to those located in other countries. However, Big-N auditors are more likely to issue modified audit opinions for their economically important clients with a secrecy culture relative to their other clients, while no or weaker evidence is found for non-Big-N auditors. The results are consistent and robust to endogeneity tests and sensitivity analyses.

Originality/value

This study enriches the literature by providing a new perspective on auditor independence that an auditor’s reporting behavior can vary depending on the client’s importance and auditor type, even under the same secrecy culture.

Citation

Lam, B.M., Mo, P.L.L. and Rahman, M.J. (2024), "Secrecy culture, client importance, and auditor reporting behavior: an international study", Managerial Auditing Journal, Vol. 39 No. 2, pp. 113-137. https://doi.org/10.1108/MAJ-11-2022-3763