Auditors’ Response to Agency Conflicts in Political Connected Firms

 Because of interest conflicts between managers-owners and the possibility occurrence of agency problems, it is important to identify the potentially driving factors of agency costs and assess the role of monitoring mechanisms in order to reduce the intensity of agency costs. This paper assessed the potentially impact of external auditing on agency conflicts in political connected firms. The ratio of operational expenses to operational sales revenues is used as an index of agency costs. Also, politically governance affiliation in either board structure or ownership structure is considered as a proxy of political connection. In addition, effective role of external auditors is analyzed using auditors’ quality control rating, rotation and industry specialization criterion. Research data include 1632 firm-year observations witch consist of 204 firms listed in Tehran Securities & Exchange. Research hypotheses investigated through multivariate regression models using panel data with fixed effect and generalized least squares method. Research evidences documented that political connected firms have high level of agency costs significantly. On other side, auditor’s quality control rating, rotation and industry specialization criterion significantly lead to reduce agency costs. In addition, findings showed that auditor’s quality control rating, auditor’s rotation and auditor’s industry specialization caused to weaken the positive relation between political connection and agency costs, so lead to decrease destructive consequences of interest divergence; In fact, reputable auditors to maintain professional reputation, new auditors to maintain audit independence, and industry-specific auditors to maintain audit efficiency and effectiveness are elements of mitigating agency conflicts, especially in firms with political connection. So, it is important to understand this issue from the aspect of political connection costs and its role in intensifying agency costs, as well as from the aspect of improving audit process and its role in weakening agency costs, especially in political connected firms.