CPA Firm's Reputation And Investor Protection

The audit quality is the core for audit research. The reputation mechanism is the mostimportant, the most fundamental and the most useful method to ensure the auditquality (Xia,2006).Audit is a very important mechanism to reduce the agencyproblem and information problem, and it can protect investors. Whether auditreputation and how audit reputation works to protect investors are very meaningfultopics. In China, the audit market has just been set up for a short time, and thegovernment has played a very important role in it. As to whether audit works is a heattopic. However, there is not enough protection for investors, which makes theresearch more important.This paper provides researching the mechanism of audit reputation, and analyzes theinfluential factors of the mechanism from the cost and efficency angle. The auditmechanism works by motivation and restriction, and it works within the limitations ofa number of factors. After exploring how to measure the audit reputation, this paperuses lots of indexes to measure the CPA firm's reputation. The indexes are: the top10and the top20measured both by the market share and the CPA firm's revenue, big4and the granted reputable CPA firm by government. This paper establishes that thetop10CPA firms both based on the market share and on the firm revenue work toprotect the investors, which shows reputation works. However, the top20CPA firmsdon't protect the investors very well. In addtion, this paper supports that reputableCPA firms do protect investors, but big4don't show a good audit quality.This paper also explores whether the reputable audit firms have influences on both thelarge shareholder's expropriation and the regulator's probe. Using a sample from2007to2010in the A-share market, this paper finds out that on average CPA firmswill issue qualified reports to expriporiation and the CPA firm with a higherreputation will be more likely to issue the qualified reports. The next year'sexpropriation will be reduceing if the audit firm is reputable. In addtion, the regulatorsuse the qualified audit reports. The higher the reputation of the CPA firm, the more attention paid by the regulators, and the more probes lauched by the regulators.Furthermore, after the government probed, the accounting information quality will beimproved on the firms audited by the reputable CPA firm, while the expropriation willdecrease on the firms audited by the repuatable CPA firms. This paper supports thatthe reputable CPA firms can protect investors theoretically and empirically.The contribution of this paper are the following: firstly this paper explores how tomeasure the reputable CPA firms, secondly the paper studys the factors that will haveinfluence on the reputation mechanism,finally the paper studies the shareholders'expropriation and regulators' attentions to the repuatable CPA firm.