Working Paper: NBER ID: w27032
Authors: Jian Chu; Raymond Fisman; Songtao Tan; Yongxiang Wang
Abstract: Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications – in which the role of shared background is identified from auditor turnover – we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor’s tenure, and is diminished for audits ordered by the provincial Organizations Department as a result of the departure of top city officials. We argue that our findings are most readily explained by leniency toward local officials rather than an endogenous response to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.
Keywords: audits; corruption; government monitoring; hometown favoritism
JEL Codes: D73; G3; H83; M42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| auditor's hometown status (H79) | quantity of suspicious expenditures identified during audits (H76) |
| auditor turnover (M42) | quantity of suspicious expenditures identified during audits (H76) |
| provincial organization department oversight (L39) | leniency of auditors (M42) |
| hometown auditors (M42) | earnings manipulation in state-owned enterprises (L32) |
| top city officials leaving office (R59) | leniency of auditors (M42) |