Do Social Ties between CEOs and Engagement Audit Partners Affect Audit Quality and Audit Fees?

Abstract

Economic agents in the same social networks could either enhance contracting efficiency by reducing information asymmetry or seek rents by promoting collusive behaviors. Recent studies have provided mixed evidence of whether social ties between a chief executive officer (CEO) and an engagement audit partner (EP) improve or impair audit quality (Guan, Su, Wu, and Yang 2016; Jeanjean, Marmousez, and Sirois 2013). By exploiting proprietary data from the South Korean audit market, where low investor protection and strong CEO power might lead to either information sharing or collusion, we add to this literature by exploring how undisclosed CEO-EP social ties affect audit outcomes. We find no evidence that audit effort, audit fees, or audit quality decreases in the presence of CEO-EP social ties. In contrast, we find that CEO-EP school ties are associated with high-quality audits and audit fee premiums. We interpret these findings as evidence that CEO-EP social ties might be important to secure a high-quality audit in a setting with low investor protection.