The determinants of auditor switching from the perspective of corporate governance in China

Manuscript Type: Empirical Research Question/Issue: This paper reports on the association between the internal corporate governance mechanism of firms and their auditor switching types in the Chinese context. Two types of auditor switching - namely switching to a larger auditor or switching to a smaller auditor - are identified and examined. Research Findings/Insights: Controlling shareholders have the incentive to seek opaqueness gains. The empirical results demonstrate that to realize opaqueness gains, firms with weaker corporate governance generally are more likely to switch to a smaller auditor rather than to a larger one. Theoretical/Academic Implications: The empirical results demonstrate that firm-specific corporate governance devices will affect a firm's auditor switching decision. An effective corporate governance mechanism may inhibit the controlling shareholder from switching to a smaller auditor to exploit the minority shareholders. The emerging economies are usually featured with concentrated ownership and insufficient legal protection of minority shareholders. Compared with prior studies, this paper generates findings more applicable to the emerging economies. Practitioner/Policy Implications: This study may facilitate market regulators and participants to maintain close monitoring of the structural arrangement of corporate governance of the listed firms, the independent auditing process and the credibility of financial reporting in an emerging market like China. The findings also suggest that in order to bolster the confidence of the market participants, the Chinese government should promote the reform of the corporate governance system and enforce effective regulations, in particular on firms' auditor switches.