Political connections, related party transactions, and auditor choice: Evidence from Indonesia

This paper investigates how political connections in concert with related party transactions (RPTs) determine auditor choice in Indonesia. Our study is motivated by conflicting findings in the literature on whether politically connected firms appoint reputable auditors (Big 4 auditors). On one hand, politically connected firms are less likely to appoint Big 4 auditors if they wish to cover up RPT-related tunneling activities by providing financial statements that fail to reflect their true economic performance. On the other hand, politically connected insiders who refrain from self-dealing would prefer higher-quality financial reporting and, hence, appoint Big 4 auditors. Using data from Indonesia, we find support for the former. By documenting the role of RPTs as a motivating factor for politically connected firms to choose non-Big 4 auditors, we enrich the political connection and auditor choice literature.