Is Audit Behavior Contagious? Teamwork Experience and Audit Quality by Individual Auditors

Using a comprehensive sample of audits for public companies in China, we demonstrate whether and how bad audit behavior spreads among individual auditors (i.e., CPAs). CPAs are deemed to be “diseased” during the period when their audits fail, and are subsequently sanctioned by the regulators. We first confirm that sanctioned CPAs systematically provide low-quality audits in terms of audit reporting and accounting irregularities during the diseased period. We then document that CPAs who have teamed up with the sanctioned CPAs are also more likely to issue lenient audit opinions and have accounting irregularities in their audited financial reports during the sanctioned CPAs' diseased period. This contagion effect is, however, hardly present among CPAs who work in the same audit firm as sanctioned CPAs but are only indirectly connected to them. Our findings highlight the importance of analyzing social learning via teamwork experience in understanding how audit quality at the individual level is shaped