Journal of Applied Finance & Banking

Related Party Transactions and Opinion Shopping

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• Abstract

   

  This paper examines the association between related party transactions (RPTs) and partner-level audit opinion shopping. The use of RPTs, generally diverse and complex, associates with an increased audit risk and the probability of receiving modified audit opinions (MAOs). In China, the audit market is dispersed and audit firms’ internal control mechanisms are weak. This enables firms to shop for a more lenient audit partner within the same audit firm to obtain a favorable opinion. I argue that firms with more RPTs have greater incentives to press audit firms to switch engagement partners to obtain more favorable opinions. Based on a large sample of Chinese listed firms, I find that successful partner-level opinion shopping increases as the amounts of RPTs rises. I also find that the positive relationship between RPTs and successful opinion shopping is more pronounced in non-operating RPTs. Policymakers may consider RPTs to have a significant effect on auditor independence and design monitoring mechanisms to prevent partner-level opinion shopping.

   

  JEL classification numbers: G34, M42

  Keywords: Opinion shopping, Partner switch, Audit quality, Related party transactions