Research On The Economic Consequences Of Audit Firm Internationalization

The demand for international audit service is increased with the development of economic globalization and enterprises internationalization.Based on the background of Chinese domestic auditing firms' registration with PCAOB,this paper investigates the economic consequences of audit firm internationalization.The development of international audit firms is one of the strategic objectives of the 13 th Five-Year plan for accounting reform and development of China.Under the encouragement of policies,more and more Chinese audit firms engage in auditing Chinese multinational clients.Many Chinese domestic audit firms have registered in PCAOB,which is a necessary requirement to audit U.S.listed companies.Prior studies primarily focus on the association between PCAOB international inspection and audit quality.However,it is difficult to clarify the PCAOB regulatory pressure or the reputational incentive of auditors under the condition of mandatory PCAOB inspection.Fortunately,China provides a unique setting to rule out the regulatory effects because PCAOB is not allowed to inspect Chinese audit firms.Hence,this paper systematically explores the influence mechanism of PCAOB registration on audit pricing,audit quality and accounting information comparability of A-share main board listed companies in China,which can examine voluntary PCAOB registration as a signal that increases the perceived value of audits performed by Chinese audit firms.As the supplier of audit products,the essential characteristics of audit firms are related to audit fee,which determines whether audit firms can provide high-quality audit products for the market,and further has an important impact on the comparability of accounting information in the capital market.So this paper explores how the internationalization of audit firms,the characteristics of audit supplier,affects audit behavior,audit results and audit functions.First,from the perspective of auditors' decision-making behavior,this paper investigates the relation between internationalization of Chinese audit firms and auditors' decision of audit fee.It shows that audit fee is significantly increased after registration due to the increased audit costs.The positive effect of audit firm internationalization is more significant for higher reputation audit firms,indicating the reputational concern and learning cost may be the potential mechanisms.Registered audit firms have the incentive and ability to improve audit quality.Moreover,further tests eliminate the endogenous impacts of audit demand factors,including institutional investors,nature of property and ownership concentration,and the potential effects of low-balling,and audit fee stickiness,which will make our evidence more robust.Second,based on the above findings,this paper further analyzes whether audit quality is increased after the internationalization of Chinese audit firms.Evidence shows that audit quality is improved after registration due to the increased competence.Analyses on audit risk and auditors' size indicate that the incentive to provide high quality auditing is increased after PCAOB registration.Further tests of the number of certified public accountants(CPAs)and the educational background of CPAs show that the audit firms absorb more highly educated CPAs after PCAOB registration,which to some extent verifies that the increased competence of internationalized audit firms makes audit quality improved.Finally,considering accounting comparability is a desirable property of financial statements,this paper investigates the relation between audit firm internationalization and accounting comparability.It shows that clients' accounting comparability is significantly increased after Chinese audit firms registered with PCAOB,implying a positive externality effect of PCAOB on foreign listed firms beyond inspections.Further analyses show that the relation between PCAOB registration and clients' accounting comparability is more significant for audit firms with higher reputation.As well,auditor independence is increased after registration,suggesting the signaling and learning effect of PCAOB registration.Moreover,robust checks are provided with clients' size,state ownership and QFII ownership which confirm the above effect.These results indicate that audit firm internationalization is a potential channel that accounting standards affects comparability,and bring insight into the role of auditors in accounting information processing,which could reduce information uncertainty and information acquisitions.Meanwhile,this research not only demonstrates the role of PCAOB in information processing beyond inspections,but also extends the determinants of accounting comparability.The above studies show that audit firm internationalization increase audit fee,audit quality and accounting comparability through the channel of auditors' motivation and ability.It implies registration with PCAOB could induce auditors to learn audit methods,accumulate international experience,improve professional judgment and integrate with international standard systems,which is beneficial to the high-quality development of audit market,the stability of capital market and have implications for the internationalization of other information agencies.