The impact of institutional environment on auditor reporting: evidence from China's anti-corruption campaign

Purpose The purpose of this study is to examine whether the institutional environment influences auditor reporting. Design/methodology/approach This study employs China's anti-corruption campaign as an exogenous shock to its institutional environment and compares auditors' issuance of modified audit opinions (MAOs) to small-profit clients before and during the campaign. Findings This study documents that small-profit clients were more likely to receive MAOs during the anti-corruption campaign period than before, indicating that auditors issued more conservative audit opinions to small-profit clients because of the anti-corruption campaign. Additionally, this study finds that increased auditor conservatism was more pronounced for auditors of large clients. Practical implications This study suggests that a weak institutional environment adversely affects auditor conservatism. This offers valuable insights for governments and regulators to improve the audit environment and for audit firms to enhance auditors' integrity and independence. Originality/value This study contributes to the research on institutional environments and auditing by observing a unique exogenous event.