The Association Between Corporate Governance and Audit Quality: Evidence from Taiwan

Abstract

Purpose – Audit quality is traditionally defined as the joint probability that an existing problem is discovered and reported by the auditor. This study examines whether and how audit quality is associated with related-party transactions and CEO duality. The first part (i.e., the ability to discover) is related to professional judgment, and the second part (i.e., report truthfully) is related to independence.</p><p>Methodology/Approach – Regression methods was used on archival data.</p><p>Findings – Our results reveal that for publicly held companies in environments with stronger capital market discipline, which causes greater reputation concerns and litigation risks, a CEO who is also the board chair does not hinder auditor independence. For privately held companies, however, such a CEO hinders auditor independence due to a lack of capital market discipline. The findings on related-party financing, on the other hand, are reversed. That is, in terms of information for an auditor, since the conflicts of interests are more severe in publicly held companies than in privately held companies, the relevance of related-party financing to a decision whether to issue a going-concern opinion is greater in publicly held companies.</p><p>Social implications – The empirical results of publicly held companies are useful for countries with better corporate governance, while those of privately held companies are helpful for countries with relatively weak corporate governance.</p><p>Originality/Value of paper – Because auditors performing audit services face different litigation risks and reputation concerns, the differences in our results between the two types of clients can have implications about the suitability of these types of companies in emerging markets