The Impact of Non-Operating Related Party Transactions by Affiliated Business Groups on Earnings Persistence: The Effect of Audits from the Same CPA Firm

Related party transactions are conducted between components within an affiliated business group and these transactions in the normal course of operations are beneficial for the improvement of the operating performance of the group. However, abnormal related party transactions can be used by managers of the group to manipulate financial statements. If auditors of the group can better understand the content and characteristics of related party transactions, then they can determine the rationality of the transactions and further inhibit improper transactions more accurately. The findings of this study indicate that most components of an affiliated business group are audited by auditors from different CPA firms that do not fully understand the nature of related party transactions. As such, affiliated business groups may conduct related party transactions by means of non-operating activities, which could decrease earnings persistence. Yet, when components of the affiliated business group are audited by the same firm, as opposed to being audited by different firms, earnings persistence would not be decreased. It is noteworthy that the results have to do with the significance of the companies under discussion for the following: either the CPA firm conducting the audits is big or the affiliated business group itself is big.