Auditor choice and nonaudit fees: Evidence from group‐affiliated Indian firms

• Published date: 01 April 2023
• Author: Mohinder Parkash,Rajeev Singhal,Yun (Ellen) Zhu
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22593

Received:  May  Accepted:  August 

DOI: ./jcaf.

RESEARCH ARTICLE

Auditor choice and nonaudit fees: Evidence from

group-affiliated Indian firms

Mohinder Parkash Rajeev Singhal Yun (Ellen) Zhu

Department of Accounting & Finance,

School of Business Administration,

Oakland University, Rochester, Michigan,

USA

Correspondence

Rajeev Singhal, Professor of Finance,

Department of Accounting & Finance,

School of Business Administration,

Oakland University, Varner Drive,

Rochester,M I , USA.

Email: Singhal@oakland.edu

Abstract

We study the interplay between auditor as an instrument of corporate gover-

nance and the ownership structure of firms in the Indian context. Our study is

motivated by the literature on agency problems occurring from both the con-

flicts of interests between owners and managers (Type I problem) and those

between dominant and passive stockholders (Type II problems). Investors con-

trolling Group-affiliated firms have incentives and influence to monitor their

firms, resulting in amelioration of Type I problems, which is expected to result

in lower demand for high-quality auditors. However, in situations where Type

II problems dominate, the Group-affiliated firms have incentives to, (i) miti-

gate conflicts with minority shareholders by using high-quality auditors, and

(ii) strengthen the perception that their auditors are independent. We find that

Indian group-affiliated firms tend to choose BigN auditing firms and that upon

selection of a BigN auditor, there is no difference in the magnitude of nonaudit

services purchased by both the Group-affiliated and non-Group-affiliated firms,

but when a non-BigN auditor is chosen, the Group-affiliated firms purchase sig-

nificantly higher nonaudit services as compared to firms not affiliated to groups,

suggesting that when Group-affiliated firms select reputed auditors they also

strive to maintain the perception that auditors are independent.

KEYWORDS

agency conflicts, group-affiliated firms, nonaudit fees

1 INTRODUCTION

In emerging economies, the private sector is heavily dom-

inated by firms affiliated to business groups (Khanna &

Rivkin, ). More generally, business groups are an

important component of the private sector in an emerg-

ing economy and ownership concentration is higher for

listed firms in weaker legal environments (La Porta et al.,

). Typically, Khanna and Rivkin () find concen-

trated ownership of one or more families with strong ties in

group-affiliated firms. Further, Fan and Wong ()find

in the emerging markets, this phenomenon has become a

prominent feature of publicly listed firms.

Affiliation to a business group is prevalent in the Indian

corporate environment and has become a large part of one

of the fastest growing emerging economy. According to

Basu and Sen (), group-affiliated entities account for

% of the capitalization of the Bombay Stock Exchange.

Although, several papers have analyzed the various fea-

tures of Indian business group affiliation (Khanna &

Palepu, ; Khanna & Rivkin, ; Gopalan et al., ;

Manos et al., ), limited research has been conducted

J Corp Account Finance. ;:–. ©  Wiley Periodicals LLC. 23wileyonlinelibrary.com/journal/jcaf