| The CPA industry in China has a less-developed history, and its relative systems are not consummate. At present, the whole industry business income mainly comes from traditional auditing, resulting in excessive competition in the audit services market, and leading CPA’s professional quality and credibility level under serious threat. In order to promote the healthy development of CPA industry, the Chinese government has taken polices different from western developed countries to encourage accounting firms expanding non-audit business market. In this context, this paper mainly researches the effects of CPA industry expanding non-audit business on audit quality and audit fees, and the response of capital markets for this kind of expanding to further understand the specific impacts of expanding non-audit business in the present stage and provide theory basis and empirical supports for the government regulatory.Firstly, this paper defines the concept and category of non-audit services or business, and also defines the audit market performance in this paper that refers to three aspects including audit quality( using discretionary accruals as its proxy variable), audit fees and the reaction of stock price in capital markets Next, this paper introduces the development history of non-audit business in foreign and the present situation in the domestic. Basing on the effects of non-audit services or business on audit quality, audit fees and the reactions of the third party for a clue, this paper reviews normative and empirical work of relative literatures from domestic and foreign scholars. On the above analysis, the researching perspectives of this paper are proposed.Secondly, using the principle-agency theory, incomplete contract theory, rent-seeking theory, knowledge spillover theory and the theory of industrial organization, this paper analysis the impacts of non-audit services or business on audit quality and audit fees.(1) According to the principle-agency theory, this paper argues that when CPAs accept the entrustments of non-audit services, they can not maintain due independences because of differences of asymmetric information, high transaction costs and different utility functions among owners, auditors and management authorities.(2) Incomplete contracts make principal-agent relations change, and further exacerbate the joint purchases of non-audit services and audit service to damage the independence of audit.(3) According to rent-seeking theory, this paper argues that there is the possibility of rent-seeking between management authorities and CPAs, because they master their advantage resource in the audit activities.(4) At the same time, the combination of non-audit service and audit service provided by CPAs can also produce the effect of knowledge spillover. The knowledge spillover can enhance the professional competence of CPAs and auditing efficiency, and thus affect the audit quality and audit fees.(5) Using the industrial organization theory referring to the relationship among market structure, market behaviors and market performances, this paper argues that expanding non-audit business in accounting firms can reduce its reliance on audit business, alleviate the fierce competition in the audit market, and improve audit quality and audit fees. But the development of non-audit business may also lead to the whole industry competition patterns change. CPAs may reduce audit fees and audit independence to attract more non-audit services, and thus get more fees through all kinds of non-audit services. Above all, through the analysis of these theories, we find that the expansion of non-audit business in the CPA industry affects audit quality and audit fees through different ways, but the ultimate effect depends on various aspects of game and needs to be combined with the specific conditions of China for further empirical test. For this reason, this article sets empirical test from three angles of the enterprises, accounting firms and capital markets.1. From the enterprise perspective:(1) In general, the empirical results can not find the significant adverse effect of the non-audit service scale jointly bought by enterprises on audit quality. For this, we need to further test this kind of impact separately from two aspects of audit independence and professional competence. In terms of audit independence, this paper adds two regulating variables of enterprises ownership and legal environment. The results show that when the auditee are non-state control, the bigger is the scale of non-audit services jointly bought by enterprises, the worse is CPA’s audit quality. When the auditee are state control, the relationship between them is not significant. This paper further finds that when the non-state controlled enterprises are in good legal environment, the relationship between them is not significant. when the non-state controlled enterprises are in poor legal environment, the relationship between them is negatively significant. This shows that when the enterprises have strong earnings management motivations, non-audit services may be the ways to enterprises’ ―buying‖ CPAs, and the good legal environment can inhibit non-audit services to play the negative role. In terms of professional competence, after adding the the regulating variable of the non- industry expertise, the empirical results show that the bigger is the scale of non-audit services that accounting firms with non-industry expertise offer jointly, the better is audit quality. This shows that in the absence of industry expertise, non-audit services can play a similar role as industry expertise, and improve the professional competences of CPAs.(2) As for the effects of non-audit services scale jointly bought by enterprises on audit fees, this paper used the simultaneous equation models for controlling endogenous impacts, finding that there is no a significant influence of non-audit services scale jointly bought by enterprises on audit fees. This paper argues that this phenomenon dues to specific conditions in China that because of the small scale of non-audit service jointly bought by enterprises in general, this will not produce the ―spillover‖ effect of reducing the audit cost, or even though the ―spillover‖ effect exists, this effect will not be passed to the customer under the bad overall operating conditions of accounting firms.2. From the accounting firms perspective:(1) As for the influence of the non-audit business scale of accounting firms on audit quality, this paper carries on the empirical test from two aspects of horizontal and vertical angles. The results show that the bigger is non-audit business scale of accounting firms and the growth is the non-audit business scale compared with the previous year, the better is audit quality. Combined with the two regulating variables of enterprise ownership and legal environment separately, the empirical results show that the positive relation between audit quality and the scale is in non state-owned enterprises or the bad legal environment, and the positive relation of audit quality and the growth is only in non state-owned enterprises. This shows that the expansion of non-audit service in accounting firms can reduce its reliance on audit business, strengthen the audit independence, and it can further enhance the effect of audit independence in the case of system environments against to improve the audit independence.(2) As for the influence of non-audit business scale in accounting firms on audit fees, this paper also carries on the empirical test from two aspects of horizontal and vertical angles. The results show that bigger is the non-audit business scale and the growth is the scale compared with the previous year, the more are audit fees. This suggests that the development of non-audit business in accounting firms can increase their ability to compete in the audit market, and improve the charging of audit fees at present.3. From the capital markets perspective: Using the method of event study, this paper carries on the research from two views of enterprises and accounting firms.(1) From the point view of enterprises, this article selects the paired samples for empirical tests. The results show that there is a negative correlation relationship between the size of non-audit services disclosed in the financial statements and CAR to a certain extent and this kind of relationship only exists in the samples with positive unexpected earnings, the samples of non-state controlled enterprises. This shows that investors believe the combined providing of non-audit services and audit services may damage the credibility of financial statements, and in certain circumstances they enlarge this doubt. This also suggests that the markets have recognizing abilities, and we should make use of its own mechanisms for regulation.(2) From the point view of accounting firms, this paper finds that the information of the non-audit business scale of accounting firms has no effects on CAR. This suggests that investors will not link this kind of information with the reliability of corporate financial statements. This also suggests that the development of non-audit business in accounting firms will not be considered as doing nothing and reducing CPAs’ practice abilities of auditing.Overall, the development of non-audit business in present China can reduce business risks, alleviate the excessive competitions in the audit market, strengthen audit independence, improve professional competences of CPAs and increase audit fees, but the combined providing of audit services and non-audit services in certain circumstances may also damage the audit independence. The strong legal supervision and full disclosure of corporate information can limit its negative effects. On this basis, this paper puts forward a series of relevant suggestions to promote benign development of non-audit business in CPA’s industry.The main innovations are as bellows in this paper:(1) The previous studies on non-audit services are rare from the perspective of the accounting firms business structure. From this perspective this paper studies and finds that non-audit business scale and its growth can improve audit quality and audit fees, and in the institutional environments that are not conducive to enhance audit independence, they play significant roles in improving audit quality.(2) This paper first attempts to study price effects arising from the non-audit service or business information published companies or accounting firms. The research finds the information of the scale of non-audit services jointly purchases by enterprises in the financial statements and CAR are a negative relationship to a certain extent, and the relationship will more amplify under certain conditions. But this paper does not find that information of the scale of non-audit business of accounting firms has affects on CAR.(3) In the research to the influences of enterprises’ joint ―buying‖ on audit quality, the paper studies the influence from two aspects of auditors’ independence and professional competence abilities, combining the enterprise ownership, legal environment, the initial audit commission, non-industry expertise to do a further discussion to the previous researches, and finds that the joint purchase of non audit services and audit services may weaken the audit independence, but also exists the positive roles of enhance practicing abilities, and a good institutional environment can control its negative effects.
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