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Audit Quality and Business Complementarity
En - Te Hsu,
Tunghai University
Joanna L. Y. Ho, University of California Irvine
Pei - Chen Lee, Tunghai University
ABSTRACT. There is a growing trend toward companies forming strategic groups to increase their business complementarity, to gain advantages in the global market. Particularly in collectivist cultures, client firms’ business complementarity are likely to increase their negotiation power with auditors, which may lead to an increase in auditors’ tolerance of client firms’ intentional and unintentional errors in the financial statements. This study confines our examination to whether client firms’ business complementarity affects audit quality in Taiwan which has embodied a collectivist culture. We provide evidence to suggest that when client firms have high business complementarity, their audit quality decreases. However, our results show that auditors’ industry specialization mitigates the negative impact of business complementarity but Big 5 auditors do not. Nonetheless, we did not find that increased market competition exacerbates the negative impact of business complementarity in Taiwan.
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