A Study On The Government Regulation And Audit Quality Improvement

Audit quality is always a hot problem in the auditing field. A high-quality audit has an obvious effect on ensuring information disclosure quality of listed companies and improving the allocation efficiency of the capital market. But due to the characteristics of auditing industry, the phenomenon of low-quality auditing and the"conspiracy"between auditors and listed companies frequently arise in practice. For example, in Enron event which shaking the whole world, Andersen CPA firm in a long time had concealed the deficit fact for Enron and destroyed an amount of relevant auditing materials when the truth was revealed. Henceforth, the World Com Group, global dispatch and Xerox etc.,"Big Five"CPA firms also had been involved in more and more financial scandals. In homeland, from the"old three fraud cases", the"new three fraud cases"to Lantian, Yi-an, Qinfeng agriculture and KeLon etc., the financial scandals of listed companies have been exposed. At the same time we always could find a conspirator, CPA firm, under the shadow. Similar to scandals floating out, fraud cases in the listed companies also show the conspiracy between regulating institutions and companies. These financial scandals in which auditors had been involved appeared one after another, making audit quality problems become more noticeable.It is not accidental that a series of financial scandals happened in domestic and abroad, and the problems bringing out are quite more, of which the most serious problem is the inefficient regulation on auditing industry. So it becomes an issue both in theory and in practice that how to reinforce the government regulation in auditing industry to improve the audit quality. This dissertation studies audit quality just from this viewpoint, and the research approach is as follows: Firstly, based on analyzing the failure of auditing market, the author systematically analyzes the function mechanism of government regulation to improve audit quality in theory using regulation economics and government regulation theory and so on. Secondly, after analyzing three kinds of auditing regulation patterns and their suitable conditions, the author concludes that the regulation pattern in our country should "mainly focus on government regulation with supplementary of industry discipline", and deeply analyses the defects existing in our regulation system. Thirdly, taking the penalty notices announced by China Securities Regulatory Commission to auditors as samples, the author investigates the factors influencing audit quality from the government regulation, and examines the effects of government regulation to improve audit quality from governmental rules and punishment. Finally, in view of the results, the author proposes some strategic suggestions.This dissertation is composed of eight chapters, and the main contents of each chapter are as the following.Chapter one is an introduction, leading out the research subject, re-defining the concepts of audit quality and government regulation, and indicating the research approach and structure. In this chapter, the author divides influencing factors of audit quality into direct and indirect factors at two levels. As an indirect factor, government regulation improves audit quality through affecting auditors or corporate governance factors. However, in the direct factors, in addition to professional competence and independence, the author adds due care as the third factor which directly affects the audit quality.Chapter two is literature review. In this chapter, the author systematically reviews the empirical documents on audit quality, and classifies the existing literatures on the government regulation and audit quality into two categories: one is about taking the regulation results as a measure of audit quality, the other is about analyzing the effect of government regulation on audit quality. The former mainly examines the factors affecting audit quality just by taking lawsuit or punishment as a result of poor audit, and the latter mainly tests the effectiveness of regulatory policies in China's securities market and statistically analyzes the penalty notices.Chapter three is the theoretical analysis on government regulation and audit quality improvement. The purpose of this chapter is to provide a theoretical framework for the theme of this study. First of all, the author reveals the nature of auditing is"control"by applying the theory of accountability, and concludes that high audit quality plays a necessary guarantee for achieving the audit function of value-added. Then, the author analyzes the influence of the current engage model on audit quality and concludes the factors resulting in the failure of audit market: insufficient demand for high-quality and low-quality audit services. After that, associating with the regulation economics and evaluating them, the author concludes that the public interest theory could preferably provide a theoretical basis for China's regulation in audit market. At last, the author analyses the function mechanism of government regulation to improve the audit quality in details.Chapter four is a discussion of China's auditing regulation pattern and current situation. In this chapter, after analyzing and evaluating the current three auditing regulation patterns, the author points out China's current auditing regulation pattern. Then, in accordance with the regulation practice of main bodies in China, the author indicates the problems existing in the current regulation system which lays hints for the following empirical studies.Chapter five is an empirical analysis on factors affecting the audit quality from the government regulatory perspective. This chapter takes the penalty notices announced by China Securities Regulatory Commission from 2002 to 2006 as the research samples to examine whether the primary factor which affects the China's audit quality is professional competence or independence. The result shows that independence is the chief reason for low quality audit.Chapter six mentions the establishment of government rules and audit quality improvement with the mandatory rotation of auditors as an example. According to the conclusion of chapter 5, the author selects the mandatory rotation of auditors as an example to test the government rules'effect on improving audit quality from the pre-regulatory perspective. The results indicate that the rule of CPA mandatory rotation does not reach the expected purpose. In mandatory rotation, the firms change plays a better role on the improvement of audit quality than the rotation of CPA does. However in voluntary changes, when audit opinion in last year was qualified, the rotation of CPA plays a better role on the improvement of audit quality than the firms change does, but the conclusion is contrary when audit opinion in last year was unqualified.Chapter seven is an empirical discussion of the government punishment and audit quality improvement. Following chapter 6, this chapter from the post-regulatory perspective to test the government punishment'effect on improving audit quality. The results indicate that China's government regulation can identify the poor audit quality in a certain extent. But due to the constraints of regulatory power and force, it diminishes the efficiency of government regulation to improve the audit quality. Specifically, auditors only in negative earnings management group improve audit quality by reducing the surplus space after being punished.Chapter eight gives policy recommendations on strengthening government regulation and improving the audit quality. On the basis of summarizing the main conclusions of this paper, the author proposes some corresponding policy recommendations from strengthening regulation for improving audit quality, and points out the limitations of this study and the directions of future research.There are several innovations in this dissertation.Firstly, the anthor comprehensively and systematically studies the relationship between government regulation and audit quality improvement from the government regulatory perspective in this dissertation. She not only clarifies the function mechanism of government regulation to improve the audit quality in theory and establishes the important status of government regulation in policy arrangement of independent auditing, but also obtains some valuable empirical evidences by using the method of empirical research to test the effect of government regulation on improving audit quality.Secondly, this dissertation develops the analysis approach on the factors affecting audit quality, and divides them into direct and indirect factors at two levels. In direct influencing factors, in DeAngelo's view on audit quality that professional competence and independence are two influencing factors of audit quality, the author adds due care as the third factor according to analysis of penalty notices announced by China Securities Regulatory Commission. In indirect factors, such as company, government regulation and other factors, the author considers government regulation is one of the most important factors which will influence audit quality through direct or indirect factors.Thirdly, this dissertation amends and innovates the indicators of audit quality and the model. On testing what influence audit quality, the author uses the punishments of China Securities Regulatory Commission made to auditors as the indicator for audit quality, which better associates the government regulation with the audit quality. Furthermore, this dissertation innovates the Lennox model by introducing the"mandatory rotation"variable to test the effect of mandatory rotation of auditors in improving audit quality.