Accruals Quality, Auditor Appointment And Auditor Decision-making,

Earnings quality is the most important concern to investors in capital market. Accrual quality decides earnings quality, which is one of the most important measurements of information risk and audit risk. This paper investigates the effect of accrual quality on firms and auditors'decision. Our sample period is from 2003 to 2005.Based on auditing practice which including engagement stage and auditing stage, we sequentially investigate the effect of accrual quality and its components on auditor choice, audit fee and audit opinion.Our results show, accrual quality is the key factor in making decision for both firms and auditors.When firms make auditor choice decisions, innate accrual quality is positively related to auditor choice.For auditors, both accrual quality and discretionary accrual quality is negatively related to audit opinion, innate accrual quality is negatively related to auditor fee. Overall, our results indicate firms and auditors adopt different strategies to accrual quality. Firms choose high quality auditors based on their innate accrual quality, and auditors will charge higher audit fee to cover the innate risk from innate accrual, and issue modified opinion to cover the discretionary risk from discretionary accrual.Additionally, our results suggest that if we ignore dividing accrual quality into innate accrual quality and discretionary accrual quality in investigating the effect on auditor choice and auditor decision, the conclusions would be biased.