The Impact of Labor Unions on External Auditor Selection and Audit Scope

We examine whether labor unions influence external auditor selection and audit scope. As a major user group of financial information, labor unions likely demand financial information of high quality and thus high quality audits. As a union’s request for wage increases is likely strong when a firm is performing well, management has incentives to manipulate earnings downward and may therefore prefer less strict auditors. Using union data unique to Korea, we find that unionized firms tend to choose higher-quality auditors (i.e., Big N or industry-specialist auditors) than do non-unionized firms. We also find that unionization is negatively (positively) associated with positive (negative) abnormal audit fees and audit hours. Given that departures from normal audit fees and audit hours in either direction arguably impair audit quality, our finding is consistent with unions’ demand for high-quality audits. The findings on unions’ effects are more pronounced when the union is stronger and more active. Our findings suggest that labor unions play an important role in determining audit quality.