Auditors’ Response to Controlling Shareholders’ Share Pledging: Evidence from Audit Opinions and Audit Fees

Koon Hung Chan, Jin Jiang*, Phyllis Lai Lan Mo, Hua Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Share pledging is an important source of financing for shareholders in China. We investigate whether auditors respond differently in terms of audit reporting and pricing when client firms’ controlling shareholders pledge their shares to support their firms’ financing (business-pledging firms) or to increase their personal wealth (individualpledging firms). Based on data from listed nonstate-owned Chinese firms, we find that auditors are less likely to issue modified audit opinions and more likely to charge lower audit fees to business-pledging firms than to individualpledging firms. Additional evidence indicates that business-pledging firms have better financial reporting quality than individual-pledging firms. Taken together, our results suggest that auditors’ assessments of clients’ business and audit risks are associated with the objectives of controlling shareholders’ share pledging, which has significant policy implications for capital market participants.

Original languageEnglish
Pages (from-to)27-53
Number of pages27
JournalAuditing
Volume44
Issue number1
DOIs
Publication statusPublished - 1 Feb 2025

Keywords

  • audit fees
  • audit opinions
  • controlling shareholders
  • share pledging

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