Research On Supply-demand Dimensions Audit Quality Based On Political Strategy Perspective Of Family Listed Firms In China

External audit is the important supervison power in the capital market which can play both supervison and signal-transmission function for listed firms, maintain and guarantee the security of accounting and economic information of the capital market via providing assurance for the accounting information and expressing audit opinion from independent third-party perspective. Due to the "black box" characteristic of the external audit service and highly-standardized format of audit report, audit quality cannot be accurately perceived nor directly observed by the information user, which is different from the auditor's behavior. Therefore, the academic research on the audit quality is generally based on the perceived auditor reputation using the size of the accounting firms such as "International BIG 4" or "Domestic TOP 10" as an alternative indicator of audit quality.The auditor reputation level is the market-perceived general recognition and evaluation of the level of both protecting interests of stakeholders and the maintenance of professional ethics by auditors,which determines the reliability of accounting information of listed firms, and reflects the auditors'capabability of enhancing the facticity and reliability of financial statements. In general,market-perceived auditors' reputation can measure audit quality from the demand dimension.However, with the media explosion of financial fraud scandals of listed firms including "Green Earth(Stock code:002200)","Zixin Pharmacy(Stock code:002118)" "Wanfu Shengke(Stock code:300268)",a series of domestic TopN accounting firms such as "Zhongtianqin","Shenzhen Pengcheng","Lixin" and "Ruihua" have received suspension of carrying on new securities business such as fines, liscence suspension or even termination of new securities business engagenements by China Securities Regulatory Commission(CSRC) or The Chinese Institute of Certified Public Accountants(CICPA). This situation lead to the continuous challenges and query of the basic assumption “Market-perceived auditors' reputation can effectively measure the level of audit quality" from the audit practice to empirical research area. Meanwhile, it has also inspired the strong motivation of regulatory authorities and academics to explore the micro -operating mechanism characteristics from audit supply dimension, and to open the "black box" of accounting firms practice.The structural reform of industrial supply side has been a new focus perspective of government policy under the the new normal of economy in recent years. The improvement of the supply structure and quality has become the new economic development situation. The smooth progress of the "supply-side reform" needs to accelerate the formation of a fundamental institutional system,the effectiveness of property rights protection system, the efficiency of market resource allocation and the capital market with sound regulatory function. External audit is the important institutional arrangement for the economic information security of the capital market. As the carrier of external audit institution, the CPA industry should promote the reform based on improving audit quality and optimizing the efficiency of external audit function. On the one hand, during the evolution process of property rights of China's accounting firms complying with the government-led "Being Bigger and Stronger" transition policy,the "black box" issues referring to audit quality control mechanism and internal governance in accounting firms are becoming more and more obvious. The negative impacts of relevant issues such as defect of quality control system, the imbalance of interests distribution and decision-making mechanism among partners, the function failure of incentive and restraint mechanism of the employees towards audit quality and audit industry development have been continuously paid attention by the supervisory division; the structural reform of supply side exists the very urgent realistic demand. On the other hand, the structural reform of CPA industry supply side has the significant positive effect on improving the level of economic information quality protection and promoting the efficiency of supply-side reform in the whole society. Under the condition of insufficient audit demands and the dual pressures between going-concern and quality guarantee, accounting firms would follow different paths of value judgment on audit service and form 2 alternatives "quality-based" and "profit-oriented" value logic characteristics; and eventually determine audit quality. Therefore, we should re-consider the value logics, which are the logical starting point of going-concern of accounting firms, in order to optimize the structural reform on supply side of external audit,to open the "black box" of quality control and internal governance of accounting firms and to explore the nature of the audit quality.The relationship between audit supply and audit demand describes the basic rule of the economic value of external audit services. Under the framework of institutional economics, the function of external audit is significantly affected by the influence and intervention of institutional factors. Application of political connection strategy regarded as replacement mechanism of formal institution by family listed firms - which are audit demand subjects - significantly affect the resource allocation order of private firms and quality of accounting information, as well as intervened the supervision and signal transmission function of external audit. Most of empirical literatures explained the advantages and disadvantages of political connections for family listed firms based on the "helping hand" and "grabbing hand" model. Their main points of concern are how political connections affect firm value and organization efficiency. The function route of political connections on the accounting information quality and external audit demand need to be further clarified and explored. Meanwhile, under the realistic background of the developing degree of marketization and legislation of China's transitional economy, how deep audit quality has been affected or intervented by poitical connection still need to be explored.Based on above issues, this paper first clarified the influence mechanism of political connection on accounting information quality of China's family listed firms based on "helping hand"and "grabbing hand" theoretical model evolved from "government theory" and "rent-seeking theory" framework. Secondly, based on the theoretical basis basic of audit demand,this paper analyzed the influence pathway from auditor reputation to accounting information quality of family listed firms under the intervention of political connections, and the demand mechanism of auditor reputation of political connections characteristics. Third, based on the "neoclassical balanced value theory" and "property rights theory",this paper pioneered to explore the performance characteristics of quality control and internal governance mechanism of accounting firms affected by value logics, and the influence mechanism on audit quality. Finally, this study pioneered to explore the function path of accounting firm's value logics on family firms' accounting information quality under intervention of political connection.Based on above analysis, this paper finished following four aspects of empirical tests:Firstly, taking heterogeneity of both political connection and earnings management as starting point, this paper investigated the influence mechanism of political connection to "opportunism" and"information" attributes of earnings management of family listed firms. Our study found that, first of all, as one of firm reputation mechanisms, "NPC/CPPCC menber" connection could effectively monitor and control opportunistic earnings management which potentially harm the firm value, and suppress opportunistic part of both accruals and real earnings management; meanwhile enhance the information content of earnings management and strengthen "self-governance" function to accounting information quality. Secondly, family listed firms with "former government officials"connections usually have worse performance, lower development potential, worse internal governance and lack of power to disclose high-quality accounting information. This has led to significant reduction of accounting information quality and intensive tendencies in "opportunism"earnings management, including higher level of opportunistic accrual earnings management and real earnings management, which could support the "rent-seeking" and "shelter" effects of government on this type of firms. Finally, "industry/commercial association" connection can accelerate inter-firms information exchange, improving competitive advantage and play a significant "support" role for efficiency improvement. Meanwhile, this connection has tension to reach the earnings expectations by capital market in order to avoid being regarded as "poor firm management" and consequently being "voted with feet" by investors,the "information decision-making" attribute part of earnings management could be higher.Secondly,based on the heterogeneity of political connection and earnings management, this paper investigated the influence mechanism of political strategies of family listed firms on the auditor reputation demand. This study found that, first of all, the pathway from "NPC/CPPCC menber" political connection to auditor reputation demand can be divided into two parts: the direct aspect for signal transmission demand and indirect aspect from higher quality of accounting information quality due to "self-governance" function. At this time, the major function of auditor reputation is signal transmission rather than the supervision on earnings management. Secondly, the pathway of “former government officials" connection is usually for “hidden resources” seeking and supervision avoidance. In order to avoid high-reputation auditors' supervision, family listed firms would reduce auditor reputation demand. Meanwhile, under pressure of "former government officials" connection, high-reputation auditors would selectively narrow down the testing scope of earnings management when they are exercising risk management process. Finally, the "supporting effect" of "industry/commercial association" connection has a significant effect on family listed firms. They maintain higher auditor reputation demand for signal transmission. However, this connections type cannot directly affect the risk response process of high-reputation auditors.High-reputation auditors will not be forced to narrow down the testing scope of earnings management and suppressed the general level of accrual earnings management.Thirdly, using questionnaire data from both partners and employees of Chinese accounting firms with related qualification of securities and futures, this paper constructs the theoretical framework of value logics perception of Chinese accounting profession from quality control and internal governance perspective. This study found that, in general there is an obvious difference between two "quality-based" and "profit-oriented" value logics perception of China's accounting firms; they elaborate a "trade-off" relationship. Both partners and employees could perceive this tension between "quality-based" and "profit-oriented"; this tension would further permeates into specific operational management perspectives including professional commitment, organizational commitment and independence reinforcement of employees. From audit quality perspective,high-quality accounting firms could balance the relationship between quality and revenue and tend to be "quality-oriented"; low-quality accounting firms faces greater tension and fails to mitigate the conflict between quality and revenue with showing more obvious "profit-oriented" value logic.Fourthly, based on the dual-perspective of value logics of accounting firms, this paper investigated the interaction relationship between family listed firms with political strategies and accounting firms with different value logic characteristics. Our study found that, firstly, family listed firms with "NPC/CPPCC menber" connection have an effective high-reputation auditor demand for signal transmission; but they are not inclined to employ the “quality-based" value logics accounting firms to exercise their supervisory function. The "quality-based" accounting firms also tend to select "NPC/CPPCC menber" connection family listed firms due to the lower level of audit risk and exert supervision function on accounting information quality. Secondly, in order to avoid the exposion of potential irregularities and low accounting information quality,"former government officials" connection listed firms express a strong intention of "profit-oriented"rather than "quality-based" value logics accounting firms. Meanwhile,"quality-based" accounting firms also exclude such "former government officials" connection firms in order to avoid high-level audit risk. However,once the "quality-based" accounting firms engaged this connection type of firms, the risk response process will not be significantly affected by "former government officials" connection. Finally,"industry/commercial association" connection firms also have lower supervision demand for "quality-based" value logic accounting firms; at the same time"quality-based" accounting firms are indirectly avoided due to the higher level of earnings management. Meanwhile, "quality-based" accounting firms express the preference to this connection firms and effectively suppressed the level of earnings management. In short, China's family listed firms do not have the effective supervision demand of high-quality auditors regardless of the establishment nor the type of political connections. They even deliberately excluded high-quality accounting firms. Auditors with high reputation do not have the right to select listed firms as audit client; this selection right actually lies in accounting firms with higher level of audit quality control effieciency and internal governance. This typle of accounting firms are conscious to risk response of clients, carefully select listed firms with lower audit risk level as clients, and will not be "interference" in the implementation of audit process and eventually exert the supervision functions on accounting information quality of family listed firms.The academic contributions of this paper are mainly reflected in following four aspects:First,this study pioneered to open the "black box" of accounting firms practice as audit supply subjects and conducted multi-dimensional exploration towards the micro operation characteristics of Chinese accounting firms. During this process, we exert both large-scale questionnaire survey and CICPA expert interview completing the development and recension of questionnaires, accessed to the first-handed primary data of quality control and internal governance characteristics of accounting firms; We creatively explored the potential contradictions and conflicts between"quality-based" and "profit-oriented" value logics of accounting firms, along with the influence mechanism on quality control and internal governance mechanism of value logics. This study first explored the nature of audit quality from audit supply dimension, and validated the key role of accounting firms' "quality goes first" business philosophy on the assurance of audit quality.Second, this study originally re-investigated audit quality based on value logics characteristics of accounting firms from audit supply dimension, clarified and constructed the demand mechanism framework of heterogeneous political connection on accounting firms' value logic characteristic,and verified the differentiated governance effects between accounting firms' value logic characteristic and auditor reputation under the influence of heterogeneous political connection of the family listed firms. This study originally confirmed that China's external audit market do exists"the separation phenomenon between auditor reputation and accounting firms' value logics" based on empirical evidence; meanwhile, auditor reputation and accounting firms' value logics exert differenciated supervision function on accounting information quality. Furthermore, this study indirectly approved the positive effect of establishing quality control system and enhancing internal governance on audit quality of accounting firms.Third, based on the reality of private property discrimination caused by our transitional economy defects and resource allocation "superior-inferior order" distribution characteristics, this study comprehensively originally defined the heterogeneity of both political connections and earnings management. According to the basic theoretical analysis of government theory and rent-seeking theory, our study construct a interactive mechanism framework from "efficiency" and"rent-seeking" mechanism of political strategies to "opportunism" and "information decision-making" attributes of earnings management. This framework accurately describes the"helping hand" and "grabbing hand" effects of different types of government behaviors towards private economy.Fourth, regarding political connection as an alternative and complementary mechanism of formal institution by family listed firms, this study systematically consummated both direct demand path of political connection to auditor reputation, as well as indirect demand path of auditor reputation by affecting accounting information quality. We comprehensively investigated auditor reputation demand mechanism based on heterogeneity definitions of political connections and earnings management under family control condition, and eventually verified the differentiated supervision performance of auditor reputation on accounting information quality under condition of heterogeneous political strategy.