Research On The Impact Of IPO Audits On Subsequent Annual Audit

As an important participant in modern corporate governance,independent audit plays a key role in promoting the allocation of capital resources and the fulfillment of corporate contracts.Due to the unique setting of IPO,IPO audit is a topic of widespread concern.In the extant literature,IPO audit is mainly explained in traditional audit theory in mature markets and rent-seeking theory in emerging markets,have not yet discussed the important difference between IPO audit and annual financial report audit,and researched independently.So,there is little research on the systematic link between IPO audit and annual financial report audit after that.Based on the background of China’s IPO system and the competition situation of audit industry,this paper argues that the important characteristics of IPO audit in China are: Faced with strict regulation,as well as a weak financial accounting basis of client and a strong motivation to increase offering price,IPO auditors have a large number of additional verification input and compliance consulting,but the highly competitive environment makes IPO audit fees are lower than input.Thus "IPO audit specific investment" is formed.Because specific investments are difficult to transfer,the motivation and method of recovering such investments will affect auditors’ post-IPO actions(e.g.,audit fees,audit tenure,audit quality,etc.).Therefore,this paper aims to put IPO audit and subsequent annual audit on the basis of the unified theoretical basis of specific investment recovery,and research in three aspects:(1)How to realize the recovery of IPO audit specific investment? Do recycling incentive affect audit fees and audit tenure in subsequent annual audits? Then,discusses(2)Does recycling incentive affects subsequent audit quality? Since the transactions with high specific investment are suitable for bilateral governance through private channels,further discusses(3)Whether recovered through private channels on client side? How will the establishment of private channels affect the aforementioned subsequent audit fees,audit tenure and audit quality,and test whether the client’s controlling shareholders and managers are possible private channels? We hoped that this study will provide a new perspective for understanding the systematic behavior of auditors in time series in China’s capital market.This paper has an innovative research design.We divide all listed clients of the same accounting firm into two categories.The fist type is IPO client,did IPO audit firstly,then continue to serve as its annual audit firm.The second type is switch-in client,that is,the listed company has changed the annual audit institution,as the successor accounting firm to undertake new client."IPO audit specific investment" occurs in IPO clients,which needs to be recovered in the subsequent annual audit,and the start-up cost of switch-in clients also needs to be compensated in the subsequent annual audit,which provides an opportunity for the study of this paper.The influence of IPO audit on subsequent audit is investigated by comparing the subsequent annual audit of IPO clients and switch-in clients of the same accounting firm.Based on this research design,we find that: Firstly,IPO audit specific investment is compensated during the subsequent audit period through fees and tenure.Specifically,compared with switch-in clients,the audit fees of the IPO clients of the same accounting firm are higher and the audit tenure is longer.Moreover,with the accumulation of IPO experience of accounting firms(IPO experience,IPO experience in the same industry,IPO experience in the same region,IPO experience in the same province),the degree of IPO audit specific investment is weakened,and the difference of audit fees and audit tenure between IPO clients and switch-in clients is weakened.In addition,there is an interaction between the two recovery methods,the motivation of recovery in a short term is stronger,so the audit fees between IPO clients and switchin clients are significantly different,but not significant in the long term.When there is the expectation of limited audit tenure,the incentive to collect is stronger,and the difference of audit fees between IPO clients and switch-in clients in the sample of central-SOEs is enhanced.Secondly,in subsequent annual audit,in order to achieve the smooth recovery of IPO audit specific investment,auditors will compromise the audit quality.Specifically,the audit quality of IPO clients of the same accounting firm is lower than switch-in clients.Moreover,with the fierce competition in the audit market,it is more difficult for auditors to retain clients,and the difference in audit quality between two types of clients is enhanced.Further,we use audit quality as an interaction variable in audit tenure tests,and found that,with the reduction of audit quality,audit tenure difference is enlarged within two types of clients,which verifies audit quality compromise can ensure longer audit tenure,thereby recycling start-up costs.Finally,the establishment of private governance mechanism ensures the recovery of IPO audit specific investment.Specifically,after the chairman of the board or CEO changes,the difference in audit fees is weakened;after the chairman of board,CEO or CFO changes,the difference in audit tenure is weakened;after the chairman of board or CFO changes,the difference in audit quality is reduced.The contribution of this paper may lie in the following aspects: Firstly,we discusses the impact of IPO audit on subsequent audit based on specific investment theory,and expands the IPO audit theory.This paper discusses the uniqueness of IPO audit from the background of China’s issuance system and the competition of audit services,and puts forward the concept of "IPO audit specific investment" based on the theory of specific investment.On this basis,the internal analysis logic of the correlation between IPO audit and subsequent annual audit is constructed and empirically tested.Secondly,a new perspective of underlying analysis is proposed to understand the systematic behavior of Chinese auditors in time series,and the intertemporal audit research is expanded.Auditors’ behavior in the subsequent periods(audit fees,tenure maintenance,audit quality)will be deeply affected by initial investment.The higher the initial investment,the stronger the incentive to make up for that in subsequent periods,the higher the audit fee,the longer the audit tenure,and the higher the audit quality compromise.Thirdly,we find that the recovery of IPO audit specific investment depends on the private channel of the client’s management,which complements the research on the private relationship between the client and the auditor.Lastly,we have an innovative research design.This paper divides all listed clients of accounting firms into IPO clients and switch-in clients for the first time.The dummy of the two types of clients is used to measure the difference in the degree of initial investment.This study design may provide a new classification of clients and measurement of audit input for subsequent audit studies.In addition,this paper also has some practical significance.The improvement of China’s capital market system means that intermediary agencies are playing an increasingly important role.With the promotion of registration system and the reform of filing system of accounting firms’ securities business qualification,more and more companies will be listed and more accounting firms will join in the competition of IPO audit.IPO clients will account for a bigger percent in client portfolio of accounting firms(listed companies growing at a faster rate than any securities business qualification of firm growth rate).At the same time,the IPO registration system reform does not mean that the auditors’ liability is reduced,the right to intermediary agencies may lead to greater IPO auditor’s responsibilities.Therefore,IPO audit specific investments is likely to increase.In addition,more and more accounting firms can undertake IPO audit,so the competition in China’s audit market will continue to intensify.In short,the importance of IPO audit will become increasingly enhanced,which means that the impact of IPO audit on subsequent annual audit discussed in this paper has a broad practical basis,which may play a certain role in the development of audit industry.