The Strategic Use of Multiple Auditors and Intragroup Value Transfers: Evidence from Family Business Group in East Asia

Family business groups play an important role in East Asian emerging markets. Controlling families are inclined to transfer resources among member firms to maximize their interests. However, their intragroup value transfers may normally impair the interests of the minority shareholders of member firms from which resources are siphoned off. Effective audits could credibly increase a firm’s information transparency and thus increase the likelihood of expropriations by insiders to be detected by outsiders.

However, the controlling families could take a ‘divide and conquer’ strategy by hiring different auditors rather than a single auditor for different member firms to weaken the auditor’s disciplining role over their expropriation of member firms’ resources. First, the multiple-auditor appointment might deny each involved auditor from obtaining complete knowledge of intragroup connections and full understanding of resultant value implications for affected member firms, which would weaken the auditor’s ability to detect the controlling families’ endeavors to mask their opportunistic intragroup transactions. Second, the use of multiple auditors provides the controlling families an extra opportunity of opinion shopping for a favorable treatment, which might ex ant endanger auditor independence. Third, the multiple-auditor appointment might intensify competition pressures among auditors to retain clients, which may compromise auditor independence.

Using a sample of family business groups from four East Asian markets (e.g., Hong Kong, South Korea, Singapore, and Taiwan), this study attempts to investigate 1) whether the propensity of controlling families to hire multiple auditors grows with the agency problem inherent in their groups’ ownership structure, and 2) whether the multiple-auditor appointment is accompanied with a higher degree of intragroup value transfers. Following prior literature, this study will use two measures to capture the intragroup value transfers. One is related party transactions undertaken by a family business group. The other is the valuation implication of earnings news released by member firms for their non-announcing group peers. Earnings news released by member firms serves as a good indicator to signal resources available to be transferred to their group peers.

This study will add to auditing literature by revealing the effect of multiple-auditor appointment by family business groups on the governance role of external auditors. Meanwhile, this study will contribute to family business group literature by providing evidence that controlling families could strategically use multiple-auditor appointment to facilitate their intragroup value transferring activities. This study will also provide implications for regulators to improve the protection of minority shareholders.