Does Auditor Reputation “Discourage” Related-Party Transactions? The French Case

Abstract

SUMMARY We use a unique dataset from a sample of 85 French firms over the period 2002–2008 in order to answer the following questions: Is there any relation between the use of auditors with a brand-name reputation for providing high-quality audit reports and the number of related-party transactions (RPTs) reported to outside shareholders? And, how does a more transparent environment for the reporting of related-party transactions affect this relationship, if at all? We find that firms audited by Big 4 auditors report fewer related-party transactions. The period under study includes the change in accounting standards in Europe that occurred in 2005 with the adoption of IFRS standards, which resulted in a more transparent reporting environment for RPTs. We find that the negative relationship between auditor reputation and the number of reported of RPTs is “weaker” in a more transparent reporting environment. We argue that these results are related to the accounting uncertainty surrounding the reporting of related-party transactions that particularly affects the behavior of Big 4 auditors. JEL Classifications: G34, G38, K33, M42. Data Availability: All untabulated results are available upon request from the authors.