Political connections, financial reporting and auditing: Survey of the empirical literature

Abstract

The purpose of this paper is to synthesize the empirical research on the relationship between political connections and financial reporting quality, audit outcomes and financial analyst forecast characteristics. We view the financial reporting system and auditing infrastructure as the potential missing links between political connections and firm performance and, ultimately, economic performance. Our survey reveals inconclusive findings with respect to politically connected firms’ decisions to appoint high quality auditors. However, empirical evidence appears to provide strong evidence for poorer financial reporting quality of politically connected firms compared to their non-connected peers. Although significant progress has been made in terms of understanding the implications of political connections on financial reporting and auditing, major challenges remain in the areas of proper measurement of the variables, resolution of endogeneity concerns, and integration of theories to incorporate political connections, financial reporting and firm performance.