The Operation Mechanism And Empirical Test Of Auditor Reputation

Audit market is a typical information asymmetry market. Audit services is thepublic goods and the trust products. Audit firm reputation mechanism has played antremendous and indispensable role in the prevention of "auditors opportunists" and"reducing agency cost ". Audit firms good reputation not only increase the credibilityof high levels of auditor’s effort, but also contribute to overcome auditor’s moral riskand avoid invalid equilibrium; Audit firm reputation can help investors identify highquality audit services and enhance their price; Reputation mechanism raise the levelof social welfare by forcing the auditors more honest. Compared to the legalmandatory mechanism, Audit firm reputation mechanism have the advantages of lowcost and self-enforcing function, but its formation and good operation need effectivemarket economy, long periods and clear property rights protection.With a sample of A-share listed corporations from2008to2010, applyingeconomics, management science, game theory and other basic theory, based onChinese institutional background and existing literature, this dissertation conducts thetheoretical analysis and empirical test for audit firm’s reputation in China. Dividedinto six chapters, this dissertation finds that:(1) Using the economic theory to analyzethe nature of reputation mechanism, combined with the characteristics of auditservices, this study develops a theoretical framework of audit firm reputationmechanism theory.(2)From view of ownership structure and government ownership,the results show that: firstly, firms controlled by central government have incentivesto choose good reputation auditors, while firms controlled by county levelgovernment have incentives to choose local small auditors, and private firm’s demandfor choosing good reputation auditors have positive correlation with its ownershipconcentration. Secondly, firms control-cash flow rights divergence is negativelycorrelated with demand for choosing good reputation auditors;(3)On the basis ofclassification of listing firm’s scale, this paper studies the existence and degree ofgood reputation audit firms premium. It was found, the international "big four" auditfees are higher than the national "big five" and national "big five" audit fees arehigher than the national others. With the enlargement of the audit client’s size, thereputation premium is widening. In addition, the auditors charge the risk premium tofirms with high control-cash flow rights divergence;(4)By adopting the comparative analysis method, this study investigate how the firms’ market share and audit feechanges after punished by the CSRC administrative two years later. It was found,punished firm market share and audit fee grow faster than competitors. This means,the mechanism of punishment on bad reputation audit firm is basic failure.The major innovation of this research:(1) the dissertation develops a systematicalframework of audit firm reputation mechanism theory in China based on Chineseinstitutional background from the demand and supply view of audit firms reputationmechanism theory.(2) According to the classification of audit clients’ ultimatecontroller, this study deepens the research of different demand of audit firmreputation. Audit clients can be classified into firms controlled by the centralgovernment, controlled by the provincial government, controlled by the county levelgovernment and private firm. They have different audit firm reputation demand. Thedissertation improves companies ownership arrangement and audit firm reputationresearch. By considering the two aspects of the nature of companies ownership andownership structure, the study investigates their good reputation auditor demand.(3)This dissertation put forward a new explanation of auditor reputation premium andexpanded audit reputation premium experience research. Auditor premium is the coreconpect in audit theory. On the origin of auditor premium,domestic and foreignresearch put forword monopoly collusion,product difference and rent of governmentregulation and other interpretation. Although there are many interpretation,thisdissertation divide the origin of auditor premium into tow categories by whether ornot caused by auditors itself. The premium caused by the government monopolyfranchise can be called the monopoly premium; The premium obtained by auditoritself can be called the premium of auditor reputation. Therefore the risk premium,premium of auditor industry expertise and premium formed by auditors own marketpower all belong to the auditor reputation premium. Different reputation grades ofauditor facing different competition in audit market segments and risk assessment willundertake certain adjustment.Unlike previous related studies auditor premiumcalculated based on all samples studied, this study’s auditor reputation premium arecalculated based on classification of audit clients according to its size. Through thecomparison of the auditor reputation premium obtained in different market segments,this dissertation expands the existing audit premium experience research.(4) Thisdissertation put forward and proved auditor reputation punishment mechanismsometimes failure and sometimes effective. When the auditor reputation in the IPOmarket was damaged, auditor’s market share would drop significantly; But when the auditor reputation in the annual report of the audit market was damaged, auditor’smarket share and revenue were not decreased significantly, and even grew faster thanpeers. The reason is that the listing corporation audit demand is still mainly to copewith the government supervision department needs, investors demand for the highreputation audior is still lacking. Government ’s main motive is to avoid political risks,when avoiding political risks requires the selection of high reputation auditor, theauditor’s punishment mechanism will play a role.