Spillover effect of national audits on the external auditing of non-state-owned listed companies: evidence from China

Purpose In the context of China, this paper aims to examine the spillover effects of national audits on the external audit quality of non-state-owned listed companies through shared auditor linkages. Design/methodology/approach Using firm-year data from A-share listed companies in China between 2007 and 2019, this paper uses a staggered difference-in-difference model to examine the spillover effects of national audits on the external audit quality of non-state-owned listed companies. Findings This paper finds that national audits exert a negative externality on the external auditing of non-state-owned listed companies, leading to a significant decline in audit quality following national audit engagements. The results remain robust across a series of alternative research designs that address potential endogeneity issues. Channel analysis indicates that national audits intensify time pressure on shared auditors, which in turn diminishes their audit quality for non-state-owned listed clients. Furthermore, the adverse spillover effect is significantly attenuated when the National Audit Office’s announcement adopts a positive tone, auditors possess greater industry expertise, longer audit tenure, affiliation with a “Top 10” accounting firms or geographically proximity to the audited entity. Practical implications This paper provides practical insights for accounting firms on how national audits can affect external audit quality through increased time pressure. It suggests that firms rationally allocate the number of state-owned and non-state-owned listed clients assigned to individual auditors to mitigate negative spillover effects and improve audit quality for non-state-owned listed companies. Furthermore, this research offers valuable recommendations for countries with large state-owned sectors on coordinating national and external audit efforts to enhance overall oversight and resource efficiency. Originality/value This paper provides pioneering large-sample empirical evidence on the spillover effects of national audits on non-state-owned listed companies, a phenomenon underexplored in the extent literature. By directly examining this relationship, this study not only extends the work of Li and Jiang (2018) but also contributes to the literature on shared auditing, audit supervision and capital market regulation.