Legal Liability, Government Intervention, and Auditor Behavior: Evidence from Structural Reform of Audit Firms in China

Ku, He; Pan, Xiaofei; Tian, Gary Gang

doi:10.1080/09638180.2015.1100547

Cited by 55 publications

(30 citation statements)

References 47 publications

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“…This event had a certain overlap with the anti‐corruption campaign. However, the reform increased auditor liability and thus promoted audit quality and audit fees (He et al ., 2017a), which could only produce bias against our hypothesis.…”

Section: Resultsmentioning

confidence: 76%

Does Internal Corporate Governance Complement or Substitute for External Auditing? Evidence from China's Anti‐corruption Campaign

Jin

Tian

et al. 2021

Abacus

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Two competing hypotheses have been developed for the relationship between internal corporate governance and external auditing. One proposes a complementary relationship, while the other suggests it is substitutable. This study takes advantage of China's recent anti‐corruption campaign as a quasi‐natural experiment to explore this relationship. Using a difference‐in‐differences approach, we find that, after the campaign, internal corporate governance improved more in SOEs (state‐owned enterprises) than in non‐SOEs. SOEs were less likely to choose Big 10 auditors after the campaign, while audit firms assigned less experienced auditors to their SOE client firms and charged lower audit fees. These effects were more pronounced in SOEs that exhibited greater improvement in corporate governance. Overall, we find the anti‐corruption campaign improved corporate governance in SOEs but, at the same time, reduced external audit quality, which supports the substitution view. We argue that this result might be driven by the fact that SOEs have limited demand for high‐quality accounting information because the Chinese government maintains strong control over the capital markets.

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Section: Resultsmentioning

confidence: 76%

Does Internal Corporate Governance Complement or Substitute for External Auditing? Evidence from China's Anti‐corruption Campaign

Jin

Tian

et al. 2021

Abacus

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“…In model ( 4), the dependent variable is a dummy variable equal to 1 if a company received a modified opinion under IFRS/RAS, and 0 otherwise. Following prior studies, MAOs include unqualified opinion with explanatory paragraph, as well as qualified, disclaimer, and adverse opinions (Chen et al, 2016;He, Pan, & Tian, 2017;Wang et al, 2008). We control for auditor (DBig4IFRS/DBi-g4RAS), a firm's age (Age), leverage (Lev), operating cash flows (CFO), loss (DLoss), inventory (Inv) and accounts receivable (Rec), risk (Returns), liquidity (Quick), performance (ROA), size (Size), and financial health (Zscore) (Carcello & Neal, 2000;DeFond & Zhang 2014;DeFond, Raghunandan & Subramanyam, 2002;Francis & Yu, 2009;Lennox, 2005;Lennox & Li, 2012).…”

Section: Methodsmentioning

confidence: 99%

Protectionism through legislative layering: Implications for auditors and investors

Alon

Kim

2021

J Int Bus Policy

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Protectionism is on the rise. Although it tends to be associated with tariffs on imports, governments are increasingly applying other mechanisms to influence international business. Import substitution initiatives have been used to replace purchases from foreign producers with local alternatives. Russia implemented import substitution through legislative layering where layers of regulation created requirements targeting different industries and companies. Following sanctions imposed in 2014 on Russia, the government responded with additional import substitution efforts. We are interested in effects of such measures on the Big 4, global professional service firms, and the choice of auditors by partially privatized enterprises (PPEs). PPEs have more complex multilevel agency problems because it is less clear who is in charge. We find that companies with state ownership were more likely to switch away from the Big 4, and this was more pronounced for companies in strategic industries. It also contributed to companies switching from the Big 4 to the next tier of audit firms. After 2015, PPEs were less likely to receive a modified audit opinion on IFRS audits. However, auditor changes did not occur at the cross-listed enterprises that are under enhanced monitoring from global investors and foreign stock exchanges.

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“…Our second measure of audit quality is modified audit opinions ( MAO ) (Chen et al, ; Huang et al, ) . We follow Huang et al () and He, Pan, and Tian () and estimate the following regression model to examine the association between accounting firm ranks and the likelihood of issuing modified audit opinions:

italicMAO = β_{0} + β_{1} italicLNRANK + β_{2} italicLAGMAO + β_{3} italicLNTA + β_{4} italicQUICK + β_{5} italicRECTA + β_{6} italicINVTA + β_{7} italicLEV + β_{8} italicTURNOVER + β_{9} italicROA + β_{10} italicLOSS + β_{11} italicAGE + β_{12} italicADJRET + β_{13} italicSTDRET + β_{14} italicBETA + β_{15} italicEM + β_{16} italicSTATE + β_{17} italicBSHARE + β_{18} italicHSHARE + β_{19} italicCMI + β_{20} italicGDI + β_{21} italicLEI + β_{22} italicAFTENURE + β_{23} italicCPATENURE + β_{24} italicAFCI + β_{25} italicCPACI + β_{26} italicAFEXP + β_{27} italicCPAEXP + italicYear + italicIndustry + italicExchange + ε

In addition to some variables controlled in Equation (1), we control for size and liquidity by including natural logarithm of total assets ( LNTA ), quick assets divided by total assets ( QUICK ), the percentage of receivables over total assets ( RECTA ), the percentage of inventories over total assets ( INVTA ), and firm age ( AGE ). We control for profitability and risk of earnings management by including sales turnover ( TURNOVER ), return on assets ( ROA ), an indicator of reporting net loss ( LOSS ), and earnings management incentives ( EM ).…”

Section: Methodsmentioning

confidence: 99%

“…Our second measure of audit quality is modified audit opinions (MAO) (Chen et al, 2010;Huang et al, 2015). 23 We follow Huang et al (2015) and He, Pan, and Tian (2017) and estimate the following regression model to examine the association between accounting firm ranks and the likelihood of issuing modified audit opinions:…”

Section: Audit Quality Modelsmentioning

confidence: 99%

Is there an association between accounting firm ranks and audit quality? An examination of the top 100 accounting firms in China

2019

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Using 15,354 firm‐year observations from Chinese listed companies from 2003 to 2013, we examine the association between accounting firm ranks, disclosed by the Chinese Institute of Certified Public Accountants (CICPA), and audit quality. The results show that clients audited by higher ranked accounting firms report lower discretionary accruals and are more likely to receive modified audit opinions. Additionally, accounting firm ranks are found to better capture audit quality after recent modifications by the CICPA to include nonrevenue metrics. Finally, we find that clients are more likely to replace downgraded accounting firms and pay higher audit fees when switching to a higher ranked firm. Our results suggest that accounting firm ranks capture audit quality, have economic implications, and would serve as an audit quality indicator. This study should be useful to global accounting regulators, practitioners, and academics concerned with auditor quality in China and who seek to develop audit quality indicators.

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Legal Liability, Government Intervention, and Auditor Behavior: Evidence from Structural Reform of Audit Firms in China

Cited by 55 publications

References 47 publications

Does Internal Corporate Governance Complement or Substitute for External Auditing? Evidence from China's Anti‐corruption Campaign

Does Internal Corporate Governance Complement or Substitute for External Auditing? Evidence from China's Anti‐corruption Campaign

Protectionism through legislative layering: Implications for auditors and investors

Is there an association between accounting firm ranks and audit quality? An examination of the top 100 accounting firms in China

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