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Existing literature has discussed the effect of audit on financial reporting from the audit organisation and individual auditor perspectives. This paper introduces the concept of the auditor group, which is at the intermediate analysis level, and examines how inter-group interaction influences financial statement comparability. Using 47 mergers of audit firms in China from 1998 to 2012, I first divide pre-merger auditors into different auditor groups on the basis of pre-merger audit firms and then divide post-merger auditors into corresponding auditor groups on the basis of auditors’ names. I find that the financial statement comparability of two clients audited by different groups after a merger is negatively related to the locality of the strong auditor group and to the balance between the strong and weak auditor groups before the merger. Meanwhile, the reputation of the strong auditor group before the merger has a positive effect on the financial statement comparability of two clients audited by different groups after the merger. In contrast with the previous results, the reputation of the weak auditor group before the merger has a negative effect on the financial statement comparability of two clients audited by different groups after the merger. The locality effect of the weak auditor group is not significant. These findings suggest that inter-group interaction within the audit firm is an important factor in determining the quality of financial reporting.

Auditor Group, Inter-group Interaction, and Financial Statement Comparability: Evidence from Audit Firm Mergers in China