Economic Policy Uncertainty, Auditor Switch Decisions and Corporate Social Responsibility : Evidence From China

This study examines the impact of economic policy uncertainty (EPU) on auditor switch decisions among Chinese listed firms. I document a downward auditor switch pattern of Chinese firms during heightened periods of EPU, and this behaviour is attributed to uncompromising audit fees and lowered financial reporting quality during economic policy unpredictability. By applying quantile analysis, I reveal that auditor switch decisions more likely come from firms which simultaneously pay high audit fees and have low financial reporting quality and vice versa. My further analysis suggests that the examined decisions are sensitive to not only EPU but also other types of China-specific and global-level uncertainty. In addition, corporate social responsibility (CSR) categorically relieves the impact of EPU, thus embracing the risk mitigation theory regarding the insurance role of CSR. My findings imply that downward auditor switches during EPU elevation likely indicate firms’ greater reporting risk. Another major implication is the lower risk associated with investments in CSR firms since CSR firms tend not to compromise their audit quality by reducing auditors’ competence