Research On The Mechanism Of Auditor Reputation

Auditor reputation is an overall cognition and evaluation of the public and stakeholders on the protection of investors’ interests and the maintenance of professional ethics. Audit market is a typical market where the information is asymmetry and investors are difficult to directly observe the quality of audit services. The investorscould not be able to conclude that the audited financial statements are a true reflection of the financial condition of a company.Then the auditor’s reputation can be treated as an important measure index of audit product quality, to measure the accuracy of the financial report. According to the basic theory of audit demand, on the one hand, the audit is the common needs of the clients and agents; the purpose of audit is to reduce the agency costs during the agent relationship. As a rational agent, in order to avoid the ultimate agency costs, as long as the cost of supervision is greater than the cost of revenue. It existis the requirements of the demand of being took charge of. In order to better solve the principal-agent problem, the agent needs to find a higher professional level of third party regulatory agencies, that is, the need of high quality audit services. On the other hand, the audit has the function of improving the quality of financial information and the effective allocation of financial resources through the signal transmission, the essence of the audit function is to improve the credibility of financial information and enhance the value of financial information. Under this background, companies have the incentive to seek out high reputation auditors to improve the credibility of financial reporting.Auditor reputation in China’s capital market play a role mainly through two ways:one is administrative supervision, the other is the market mechanism.The administrative supervision can be said as, supervision departments in order to maintaining the stability of the capital market and promoting the healthy development, by laws and regulations conferred by administrative power, supervise and manage the various types of capital market main behavior. Market mechanism refers to the the relationship between the listed companies and the accounting firms, due to changes in the status of firm, firm reputation, competitiveness factors, will be changed on the audit fee or the relationship between supply and demand. In this context, the following four aspects of the problem are worth exploring:first, with the rapid development of Chinese audit market, how does the role of auditor reputation change? Second, whether the administrative supervision, as the main means of the supervision department of our country, can play its due role. How does the accounting office deal with the punishment? What is the embodiment of the auditor’s behavior? Third, Chinese signed CPA system makes the research angle can further downwards to the personal auditor level, then compared withthe administrative supervision, how does the reward and training impact? Fourth, how to measure the auditor’s reputation under the market mechanism? Can it play the role independently?Aiming at the above problems, this paper according to the basic theory of audit demand, from the two perspectives of agency theory and information theory, analysis of China’s audit market in different stages of development, path of auditor reputation, and then combined with the "green earth" financial fraud cases, analysisingthe Chinese capital market in the administrative supervision mechanism and the market mechanism of the effect, acconding to the results of theoretical analysis and case study based, the empirical test can be divided into three parts:the first, the path of accounting firm reputation mechanism from the perspective of administrative supervision; second, the path of individual auditor reputation mechanism under the administrative supervision; third, the path of auditor reputation from the perspective of market mechanism.Based on the above logic analysis, this paper has made the following three aspects of the empirical test:First, this paper examines the role of the accounting firm reputation mechanism, found that the reputation of the accounting firm has order and was impacted by the size of the firm. When the auditor reputation was effected by the administrative punishment, firms have an incentive to repair the damaged reputation, starting from their own point of view, will increase the degree of attention to the audit process, which will improve the level of audit input, from the input-output process, it can conclude the first conclusion that the auditor reputation will make accounting firms pay attention to the audit procedures, increase the input of audit; then, as the auditor reputation was damaged, accounting firms will lose the bargaining capital in the game with the listedcorporation, especially for smaller firms, because of its customer resources are concentrated, individual customers accounted for a higher proportion of income therefore, in order to retain customers, to reduce the level of audit fees. The result is that despite the increased input, which means to increase the input of manpower and material resources, but in order to reduce the audit cost, may reduce in the audit procedures or audit coverage, and then weakened to obtain audit evidence, so it can not be reflected in the audit quality, namely second conclusions in this paper, for smaller firms, that auditor reputation was damaged will lead to the audit cost, and audit quality can not be effectively improved; on the other hand, for the big-scale accounting firm, whose bargaining ability is relative huge, audit fees can maintain a relatively reasonable level, which can ensure the effective improvement of the audit quality, to overcome auditor reputation losses; finally, both large and small, in the final report issued by the audit opinion, in consideration of prudence, will be more likely to issue the non-standard audit opinions, so as to ensure that once the occurrence of accounting fraud cases, and in a certain extent reduce the auditor’s responsibility, can also be explained as the audit input promotion, the auditor can be found listed companies have the risk of material misstatement, enhancing the audit quality of the premise, more likely to issued non-standard audit opinion.Second, this paper examines the role of individual auditor from the administrative supervision, studying the training effect of accounting leader, and further inspecting theeffect of job characteristics and training direction for the improvement of audit quality. Research has found: first, participating in the accounting leader training of Certified Public Accountants is good for the improving audit quality, the audit fee exists premium phenomenon; second, in accounting leading personnel training,the quality of partner is rather lower that it of non partner; third, the trainging of chief accountant is well improved than the ordinay traing group.Third, this paper examines the auditor reputation of the market mechanism.With the continuous development of Chinese audit market, and market competition is also in constantly intensifying, the audit market itself also plays its own role.Accounting firms will change its strategy as the change of market status.The big 4 accounting firm will improve its audit quality when its audit reputation was damaged. As contrary, the local office’s audit quality was not improved when its audit status was promoting. The auditor reputation will also has effect on the choice of client, when the big firm is more likely to change client as it was punished by CSRC(China Securities Regulatory Commission).The innovation of this paper is mainly embodied in the following three aspects:First, in this paper, the mechanism of administrative regulation perspective the study of auditor reputation is more systemic and framework.Different from previous studies from a single perspective, to study the effect of auditor reputation for a single audit consequences, such as audit fees, audit quality and audit opinion, based on the audit data input, formed the entire audit process of input-output analysis framework, and finally form the auditor reputation mechanism in the complete framework of administrative supervision perspective.Second, based on the signature system of certified public accountants in our country, this paper has made further research in the perspective of certified public accountants, compared with foreign research in the perspective of the branch level can further elaboration.Based on the research of the certified public accountant personal reputation, we can further distinguish the differences of individual experience and ability, from the firm under the perspective of homogeneity, the certified public accountant of personal study will be more meaningful. Different from previous studies pay more attention to the audit results, this paper, by comparing the effect difference of accounting leading talents, makes a research on the audit process, making a deep analysis of the audit process.Third, this paper studies on auditor reputation, while government regulation dominate the market in our country, analyzed the role of market mechanism, filling in the related research’s relatively insufficient and scattered.Because the capital market in our country, the administrative regulation play a direct utility, it is focused on the existing research, this article through the case analysis proved the validity of auditor reputation in the market mechanism, and then through the real example of the large sample inspection, analyzed the auditor reputation mechanism under market mechanism, to examine the effects of the changes on market reputation for the auditor behavior.In this paper, the policy suggestions can be summed up in the following four points:First, for the development of the accounting firm, according to different scale of the firm, the paper puts forward differentiation suggestions.For small office, should strengthen the internal supervision, improve the internal risk control program standard, and emphasize their own independence, as much as possible to expand the market; for larger office, such as domestic top ten referred to in this article, should be improve audit quality, the cultivation of its reputation, the formation and continuation as the primary goal; for international big4 office, should be combined with its global unified quality control system, at the same time contact system background of our country, play its leading role in China’s capital market, expand the importance of auditor reputation, further play the advantage of the professional ability of the industry and international network, lead to the development of the overall certified public accountants industry in China.Second, for the regulators, they should grasp the new development of certified public accountants industry trends, to avoid regulatory problems existing.Should clarify the responsibilities of the regulatory department, the department is cross area a common management, learn from each other’s work, by using the method of work, can not only avoid the extra cost of supervision, and can improve supervision and effectiveness.In recent years, the certified public accountants industry in constantly promote the development of firm partnership reform, through the influence of the partnership, each partner assume joint and several liability accounting firm reputation loss, make its have motivation overall audit quality control office, and, by means of civil compensation form the external deterrent for certified public accountants.And further strengthen supervision and increasing the penalties for violations, enhance timeliness and implementation effect of the punishment, making the firm violation cost, effectively avoid the occurrence of vicious competition.Third, for the listed company, they should pay attention to the role of the audit in the enterprise financial report, the audit effect into full play.At present, the audit can reduce the agency conflict, certificate the role of financial reporting veracity and pass the reliability of signal transmission.Good auditor reputation, therefore, the authenticity of the signals will be more intense, and can reduce the agency conflict between controlling shareholders and minority shareholders, making ordinary investors recognisingthe behavior of listed companies, and improving the credibility of financial information.Fourth, for the certified public accountants industry should grasp the development trend in today’s society.In the "Internet+" concept has penetrated the from all walks of life, applied to various fields of national economy, the future development of certified public accountants industry should be combined with the concept of the Internet, paying attention to the application of large data, promoting the development of audit.Through the standardization of the audit data and interoperability, internet+ audit can effectively reduce the audit cost, make audit procedures more convenient, and the accuracy is higher.