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Three essays on audit quality Open Access


Other title
closeness in auditor-client relationship, audit quality
Type of item
Degree grantor
University of Alberta
Author or creator
Zhang, Wenjun
Supervisor and department
Dr. Jennifer Kao (Faculty of Business, Accounting & Management Information Systems)
Examining committee member and department
Dr. Srinivasan Sankaraguruswamy (Accounting, National University of Singapore )
Dr. Tom Scott (Faculty of Business, Accounting & Management Information Systems)
Dr. Roy Suddaby (Faculty of Business, Strategic Management & Organization)
Dr. Haifang Huang (Faculty of Arts, Economics)
Dr. Yao Tian ( (Faculty of Business, Accounting & Management Information Systems)
Dr. Jennifer Kao (Faculty of Business, Accounting & Management Information Systems)
Faculty of Business

Date accepted
Graduation date
Doctor of Philosophy
Degree level
This thesis presents three essays on audit quality tied up by a common thread: the implication of closeness in auditor-client relationship on audit quality and beyond. In Chapter II, I investigate the implications of close auditor-client relationships arising as time passes on clients’ operating decisions. I find long auditor tenure constrains clients’ discretion in accrual reporting, which in turn prompts firms to resort to real activity management if they are under pressure to achieve earnings targets. For a given length of auditor tenure, the presence of auditor industry expertise does not affect the association between tenure and clients’ engagement in real activity management. These findings highlight an unintended consequence of long auditor tenure and therefore contribute to the on-going debate concerning the merits and shortcomings of mandatory audit firm rotation. In Chapter III and IV, we examine the implications of close auditor-client relationships arising from economic bonding on audit quality reflected from clients’ accrual reporting and auditors’ going-concern decisions. In Chapter III, we find a significantly positive association between fee dependence and abnormal accruals prior to the passage of the Sarbanes-Oxley Act (hereafter SOX), but not in the post-SOX period, suggesting that SOX has enhanced non Big-4’s ability to withstand client pressure arising from fee dependence. These results suggest strong economic bonding between auditors and clients may impair audit quality among smaller auditors, and tightening auditors’ external litigation exposures enhances small auditors’ abilities to withstand client pressure. In Chapter IV, we find that even for firms that are most targeted by SOX, auditors do not allow economic bonding to affect their going-concern decisions in either the pre- or the post-SOX period. These findings thus suggest potential litigation risks faced by auditors in the event of failures to warn the public about their clients’ severe financial distress prior to bankruptcy are high enough to deter auditors from compromising their independence in formulating going-concern decisions. In conclusion, audit quality is affected by closeness in the auditor-client relationship and regulatory intervene may be needed depending on specific setting in terms of auditor type and auditing decisions.
License granted by Wenjun Zhang ( on 2011-01-07T14:50:31Z (GMT): Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of the above terms. The author reserves all other publication and other rights in association with the copyright in the thesis, and except as herein provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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