Do Charitable Auditors Deliver Better Audit Quality? -- Evidence from Chinese CPAs

Abstract

This paper investigates the relationship between auditor's participation in charity and their audit outcomes. Using audit-partner level charitable activity records of Chinese CPAs, we find that auditors who engage in charitable activities are associated with significantly better audit quality. Specifically, we examine engagement auditors and review auditors separately and find that engagement auditors with records of charitable activities demonstrate lower discretionary accruals, and are more conservative in issuing modified audit opinion. While firms with review auditors who engage in charitable activities are associated with lower frequency of meeting or beating analyst forecast and occurrence of restatements. Our results hold after controlling for other individual-level auditor characteristics such as gender, age, and education background as well as audit firm fixed effects.Additional test suggests that the results for engagement auditors are driven by female auditors rather than male auditors. Taken together, our results suggest that individual auditor's charity activity is associated with audit quality as it reflects auditor's intrinsic motivation of ethical conduct.