Auditor-client relationship and related party transactions disclosure: the role of family controlling shareholders from a network perspective

Abstract

Purpose This study aims to examine the effect of the auditor-client relationship (ACR) on related party transaction (RPT) types of disclosure, either RPT-efficient or RPT-conflict. This study also examines whether family controlling shareholders (FCS) negatively affect the ACR in RPT types of disclosure. Design/methodology/approach This study uses multivariate regression on 2,203 year-observations of companies listed in Malaysia during the period 2014–2017. Findings This study finds weak evidence that auditors can mitigate companies’ RPT type (RPT-efficient and RPT-conflict) disclosure while maintaining a close ACR. However, an interaction between FCS and ACR reduces the RPT-conflict disclosure. Additionally, the Big 4 auditors slightly increase the RPT-conflict disclosure, however, the relationships are inversed if the close ACR involves the FCS. The Big 4 auditors also increase RPT-efficient disclosure although in a close ACR with FCS. Meanwhile, an interaction between non-Big 4 auditors and FCS in close ACR reduces both types of RPT disclosures. Research limitations/implications The findings suggest that a close relationship between auditors and clients in firms with significant family control could compromise auditor’s skepticism. The FCS can easily influence the auditors to agree with the ways they treat the RPT disclosure. Therefore, policymakers may have to revisit auditors’ rotation policies in Malaysia, especially those involving FCS. Originality/value Trust, familiarity and future fee dependency are significant threats to auditor independence in a close ACR. This study contributes to the literature by examining the effect of a close ACR on RPT types of disclosure from a network theory perspective.