Client-firm workplace culture and auditor behavior

Abstract

We document that client-firm workplace culture quality along three dimensions – innovation, integrity, and collaboration - influences auditor behavior, as manifested by lower audit fees, less audit effort, fewer financial restatements, lower likelihood of the auditor issuing a going concern opinion, and a more favorable auditor opinion on the strength of internal controls. We find that these relations are more negative when the auditor is located further away from its client firm, and when client firms are associated with non-specialist auditors, weaker monitoring, less analyst following, and higher probability of informed trading. We also find that higher client-firm workplace culture quality is associated with fewer lawsuits and lower likelihood of material weaknesses in internal controls. Collectively, our findings suggest that information environment quality acts as a possible mechanism via which client-firm workplace culture and auditor behavior are related. This study contributes to the literature by showing that the workplace culture in client firms influences auditing-related firm outcomes.

Keywords: culture, innovation, integrity, collaboration, auditor behavior, information asymmetry

JEL Classification: M14, M41, M42