How does the simultaneous persistence of greater cash holdings and interest-bearing debts impact auditor behavior? Evidence from China

Purpose In recent years, a notable phenomenon has emerged among Chinese listed companies: the simultaneous persistence of greater cash holdings and interest-bearing debts (SP-GCHID). Instead of directly operating with their existing cash reserves, these companies tend to borrow additional debt, which incurs higher interest costs. This study aims to explore the implications of SP-GCHID and its impact on auditor risk response behavior. Design/methodology/approach Using a sample of Chinese listed companies, this study explores whether such anomaly is an important indicator of latent risks for companies, and whether auditors have effectively responded to these risks. Findings The findings reveal that SP-GCHID firms have higher agency and misstatement risks. Furthermore, auditors are inclined to increase audit inputs, charge higher audit fees and issue more modified audit opinions for SP-GCHID firms. Originality/value Given the increasing prevalence of credit defaults and financial fraud among SP-GCHID firms, the assessment of risks and hidden dangers associated with SP-GCHID firms is of great concern. This study offers an additional perspective by examining the consequences of SP-GCHID and provides novel insights into auditors’ risk response behaviors. The conclusion also helps regulators and investors better understand corporate cash policies.