Voluntary resignation of independent directors and auditor responses: Empirical evidence from Chinese A-share listed firms

We examine auditor responses to the voluntary resignation of independent directors. We show that auditors respond by increasing audit fees or rescinding engagement with their clients, but not by increasing their audit effort. Mechanism tests reveal that independent directors’ voluntary resignation leads to increased regulatory sanctions and negative media coverage, these relationships are more pronounced after the New Securities Law. Auditor response strategies follow an order of priority: at an acceptable level of perceived risk, auditors increase audit fees; when perceived risk exceeds this level, auditors will discontinue the client relationship. Auditors associate greater risk with firms that have (vs. have not) experienced consecutive voluntary resignations by independent directors. Mandatory resignation has no such effect.

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Publication Details

Journal
China Journal of Accounting Research
Published
2024-08-01
DOI
https://doi.org/10.1016/j.cjar.2024.100386
Primary Topic
Auditing, Earnings Management, Governance
Type
article
Field-Weighted Citation Impact
0.00

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article

Voluntary resignation of independent directors and auditor responses: Empirical evidence from Chinese A-share listed firms

Fei Guo, Yuhong Li, Dongling Li
China Journal of Accounting Research
Auditing, Earnings Management, Governance
article

Voluntary resignation of independent directors and auditor responses: Empirical evidence from Chinese A-share listed firms

Fei Guo, Yuhong Li, Dongling Li
article en

Abstract

We examine auditor responses to the voluntary resignation of independent directors. We show that auditors respond by increasing audit fees or rescinding engagement with their clients, but not by increasing their audit effort. Mechanism tests reveal that independent directors’ voluntary resignation leads to increased regulatory sanctions and negative media coverage, these relationships are more pronounced after the New Securities Law. Auditor response strategies follow an order of priority: at an acceptable level of perceived risk, auditors increase audit fees; when perceived risk exceeds this level, auditors will discontinue the client relationship. Auditors associate greater risk with firms that have (vs. have not) experienced consecutive voluntary resignations by independent directors. Mandatory resignation has no such effect.

China Journal of Accounting Research
Zhongnan University of Economics and Law (CN), Tianjin University (CN)
National Office for Philosophy and Social Sciences, Major Program of National Fund of Philosophy and Social Science of China
Openalex Percentile: Top 79%
Auditing, Earnings Management, Governance
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