Audit Market Competition,Client Importance And Audit Outcomes

Since the eighty of the last century,along with our market economy market reform and opening up,as an important external governance mechanism,the auditors play an increasingly important role in the capital market.No matter the securities and futures commission,the ministry of finance,government regulators,and investors,the public or other stakeholders needs to refer to the auditor,analysts and other third party to provide professional advice.Auditors need issue a reasonable opinion to the financial report of listed companies by going through regular audit process,collecting audit evidence.The process of audit can effectively ensure the quality of information disclosure of listed companies,reduce the behavior of accounting fraud,and maintain the effective operation of capital market.At the same time,the SFC requires the public-listed companies to provide financial report which has been audited by the certified public accountants in our country.As a result,with the growing demand for the audit,audit firms and certified public accountants has got great development in our country.According to statistics,until the end of 2016,the number of registered public accounting firm has reached up to 8450.At the same time,the "big four" international accounting firms has entered to our country,and has set up branch offices in some provinces successively.The increasing demand of auditing has caused the Chinese audit market competition is intense,and generally speaking it is oversupply.According to the theory of supply and demand and market competition theory in economics,when the audit market oversupply,audit market competition would increased,in order to keep the market share,audit firms will carry out "price war" strategy(decrease audit fees)or provide differentiated products(improve the quality of audit)to strive for more customers as much as possible.The "big four" accounting firms have a high level of service quality,the advantage of the "big four" accounting firms is that its audit procedures is more scientific and mature,and the audit system has richer resources compared to normal accounting firms,which enjoys a high reputation and influence in the world and has become synonymous with high quality audit.Since the early 1990 s,the international accounting firms have entered into to China market with joint venture firm,business has developed rapidly.We are trying to explore how the audit market competition influence the audit decision of the accounting firm by using the incident "big four" enter into China,the study of the local firms how to cope with the pressure of competition would provide the further guide for local accounting firms becoming "bigger and stronger".Around the audit process and audit the consequences of accounting firms,the existing scholars mainly discuss from two aspects of the audit fee and audit quality.In this background,based on the principal-agent theory,supply and demand theory,transaction cost theory,competitive market theory,reputation theory,"deep pockets" theory,game theory and other related theories,this paper discussed the logical framework of the audit consequences results by the intense audit market competition by using the event which the international "big four" enter into the various provinces and cities and set up branch offices,and then the study examines the impact of the importance of client to the auditor independence,and effect the relationship between audit market competition and audit consequences.Specifically,first of all,within the condition of symmetric information and asymmetric information,this study analysis the trade-off between auditors,the CSRC and listed companies based on the theory of supply and demand,game theory and reputation theory.Then,this study use double difference of empirical methods to discuss the audit consequences of fierce competition for audit market by using the event which the international "big four" enter into the various provinces and cities and set up branch offices.Essentially,it is a strategy for “big four” to expand,and also it aggravates further competition in the audit market in China.Therefore,would this kind of audit market competition affected local firms' audit decisions? Such as,affect the local firm's audit pricing decisions? Or even affect the quality of the audit report issued in turn quality? When the "big four" accounting firms enter into the domestic various provinces,whether it would increase the proportion of the listed companies transfer from local firms turned to the "big four",or the portfolio of customer groups for local firms have changed after the "big four" enter? Economic base determines the superstructure.Whether the level of the firm's economic dependence would affect the independence of audit,such as adjust their audit decisions for the clients with a high level of importance in order to avoid a great loss caused by customers' loss? What kind of role does the importance of customer audit play in the relationship between audit market competition and firm consequences? Based on the Shenzhen and Shanghai a-share listed companies from 1991 to 2016 as the research object,by using the statistical software EXCEL and STATA14.0 to deal with the data analysis,the following is the research conclusions:First,the shock of the "big four" accounting firms enter into China have aggravated our country's audit market competition,the local accounting firm adopted a strategy of "low baling",reduced the audit cost,which provides the direct evidence of the impact of audit competition on audit fees.Client importance affects the relationship between audit market competition and audit fees,which means the higher level of the importance of the client,the lower audit fees the accouting firm would charge.Further research indicates that analysis the difference between “big six” accounting firms in China and "non-big six" accounting firms,compared to the “big six” firms,the shock of "big four" enter the provinces to set up branch office are more likely to impact "big six" accounting firms,whose scale and reputation are quite similar with “big four” accounting firms,then "big six" accounting firms reduces the audit cost more significantly;at the same time,facing the intense competition of local firms,the "big four" international accounting firms also reduce their audit fees in order to compete for more market quota.The article further discusses the abnormal audit fees,the study found that the incident of "big four" accounting firm enter caused that the local accounting firms significantly reduce the abnormal audit fees,we believe that the mechanism local accounting firms reducing audit fees is more likely to be reduced the abnormal audit fees.Second,after the international "big four" accounting firms entered into the various provinces and cities in our country,local accounting firms is likely to learn the specification of the audit process and firm's rules and regulations of the “big four” accounting firm because of the geographical advantage,and local firms would take a more "quality services" strategy and make efforts to improve its own brand and reputation to provide high audit quality audit report in order to compete with the international "big four" accounting firms for more customers resources.Client importance affects the relationship between audit market competition and auditors' dependence,which means the higher level of the importance of the client,the lower audit quality after the audit market competition.This article provides direct evidence of the impact of audit market competition on audit quality.Furthermore,we distinguish the difference of the impact between the property rights,confirms that the effect of the relationship between audit competition and audit quality is only significant in the state-owned enterprises,but not significant in non-state enterprises.This may be due to our institutional background,which state-owned enterprises need to maintain social stability and other responsibility and face soft budget constraint,and also their market executive's incentive policy is not very effective.Generally speaking,relative to the non-state-owned enterprises,state-owned enterprises' earnings quality is not high,thus the ascension space of the earnings management in state-owned enterprise will be higher,and therefore accounting firms are more likely to control the earnings management behavior of state-owned enterprises.Third,the shock of the "big four" accounting firms enter into China have aggravated our country's audit market competition,but it does not exacerbate the frequency of auditor change,which confirms that audit market competition is beneficial to maintain the stability of the audit contract,this provides direct evidence of the impact of auditor change audit market competition.Client importance play a regulatory role on the relationship between audit market competition and auditor changes,which means the higher level of the importance of the client,the more frequency of the auditor changes after the audit market competition.Furthermore,we distinguish the difference of the impact between the property rights,confirms that the effect of the relationship between audit competition and audit quality is only significant in the non-state-owned enterprises,but not significant in state-owned enterprises.Finally,we investigates the impact of legal system of environmental on the relationship between different area,it shows that the better of the legal system environment,the more significant of the influence of audit market competition on auditor change,namely the more conducive to maintain the stability of the audit contract.The following is the main contribution of this paper:(1)This paper is the first time to use the incident of the international "big four" to enter the Chinese market for as a natural experiment environment,and analyses audit results of the audit market competition through the establishment of double difference model.The advantages of this method is ruled out other aspects of the interference factors,and make any audit results(audit fees,audit quality,the auditor changes)differences attribute to the cause of the incident of "big four" firms enter as far as possible,which shows the net effect of the changes in audit market competition.Therefore,it can established a strong causal relationship between the "big four entry" and audit results(audit fees,audit quality,the auditor changes),and made up for the inadequacy of previous research method.(2)"Big four" firms enter shook the monopoly of the local audit firm,and the original market structure began to change.This study provides a preliminary basis of subsequent government promotion for the local audit firm become "bigger and stronger" by the research of the impact of the local firms how to cope with the pressure of competition.(3)There are few research on the relationship between audit market structure and competition,and because we can not directly observed data of audit market competition,most of existing research use different substitution variables to measure audit market competition.Therefore,the conclusions of the impact of audit market competition on auditor decision came to different due to sample selection and the different capital market.This article provides direct evidence of audit market competition of the audit results,and expand the existing research of the field of the influence factors for audit fees,audit quality and the of auditor change system.