Regional Audit Market Competition,Audit Contract Stability And Auditor Behavior

The auditing market competition and auditors’ behavior have always been topics of great concern in the academic circles.In the first decade of the early 21 st century,the audit market in China has experienced waves of mergers under the impetus of a series of policies of the Ministry of Finance and CICPA.By the end of 2013,when limited liability partnership(LLP)transformation is completed,the number of securities qualified accounting firms eventually stabilize at about 40.In order to quickly achieve scale,these audit firms set up branches by absorbing and merging small and medium-sized firms in different places,which makes the competition in my country’s audit market more intense.Taking the A-share listed companies from 2013 to 2018 as the sample,combining the theoretical basis of the spatial agglomeration theory in the new geographic economics and supply and demand theory with the realistic basis of the firm’s brutal expansion and establishment of branches,using the number of audit firms and branches near the company is used as an indicator to measure the level of competition in the regional audit market at the listed company level.Firstly,based on the contract theory and supply-demand theory,by investigating the impact of the degree of competition in the regional audit market on the stability of the audit contract of listed companies,this paper explores whether the increase in the number of audit firms and offices in the regional audit market has brought the threat of replacement to auditors and the pressure of peer competition.Secondly,under the framework of Porter’s Five Forces Model,the number of law firms and branches in the adjacent area of the client company has increased,which effectively captures the bargaining power of customers,the bargaining power of auditors,the threat of auditors being replaced,the competitive pressure of peers and market entry barriers in the audit market.We further examine how auditors can respond to increased competition in the audit market in the client’s proximity region at the firm branch level.Meanwhile,we divide the regional audit market into three dimensions: the international "big four",the domestic "big six" and other small firms,and the degree of competition in the audit market in different dimensions has different impacts on auditor behavior.Through a series of studies,the following conclusions were drawn:First,the greater the degree of competition in the regional audit market,the more unstable the audit contract.The study finds that when the number of offices and branches in the adjacent area of a listed company is more,the listed company is more likely to change auditors,and it is easier to re-employ auditors in adjacent areas;secondly,by dividing auditor changes into upgrade changes and downgrades Change,we find through multivariate non-sequential Logit regression that the greater the number of offices and branches in the adjacent area of listed companies,the more likely the listed companies are to be downgraded and changed in adjacent areas,which explains the lack of high-quality audit requirements of listed companies in my country.Further research finds that the number of other small firms in the adjacent area of listed companies has a positive and significant relationship with the number of other small firms in the adjacent area,indicating that listed companies tend to be more inclined to find an "obedient" auditor for reasons of audit fees.Substitute the international "Big Four" or the domestic "Big Six" with other small-scale auditors in the adjacent area;while the size of the listed company and the quality of internal control can significantly inhibit the positive correlation between audit market competition and downgrade of listed companies.The conclusion shows that the increase in the number of firms and branches in the regional audit market has brought the threat of replacement and the pressure of peer competition to incumbent auditors.Second,the more competitive the regional audit market,the lower the audit fee will be charged by auditors.The empirical study finds that: the more intense the competition in the audit market in the adjacent area of the client company,the more firms and the number of scores,the more likely the auditor will reduce the audit fee;and the auditor reduces the audit fee mainly because the listed company is adjacent to the area of China’s "Big Six" and this is caused by the increase in the number of branches of other small-scale auditors.In addition,the study also finds that the greater the number of branches in the vicinity of the client company,the lower the auditor’s abnormal audit fees,but this is mainly reflected in the reduction of negative abnormal audit fees,indicating that the improvement of the client’s bargaining power allows the audit to charged too low audit fees to attract customers.This behavior is reflected in the charging behavior of the domestic "Big Six" auditor and other small-scale auditors;the more the number of firms and branches in the vicinity of the client company,the lower the audit efforts invested by the auditors,this reduction in audit efforts is only reflected in other small-scale auditors;further,through the group study on whether auditors were interviewed by CICPA due to low price competition,it was found that the industry supervision of CICPA can significantly restrain auditors’ low price competition behavior.Third,the greater the degree of competition in the regional audit market,the more aggressive the auditor is in issuing audit reports,which undermines the quality of auditing.The research results show that the more the number of branches in the area adjacent to the listed company,the more aggressive the audit report issued by the auditor,and the worse the audit quality.This shows that auditors will compromise their independence in order to maintain a stable relationship with clients in the face of a more competitive audit market.After subdividing the attributes of auditors in the region,it is found that this negative impact on audit quality comes from the increase in the number of other small-scale auditors,while the increase of the number of national "Big Six" auditors in the region will inhibit the improvement of the aggressiveness of the audit report,and improve the audit quality.Further analysis finds that the CICPA’s interviews with firms and the exchanges or CSRC’s public penalties on firms can play a regulatory mechanism and effectively restrain auditors from compromising their independence in the face of increased competition in the auditing market.The main research contributions of this paper are as follows:(1)This paper extends the literature on audit market competition to the micro level of listed companies.In the past,the audit market competition level was replaced by examining the audit market share concentration,but this indicator is relatively general and inaccurate in reflecting the competition level of the audit market.Combining the new economic geography theory and the theory of supply and demand,this paper selects relatively exogenous indicators,and uses the number of audit firms and offices in regional audit market to measure the regional audit market competition level,which makes up for the deficiencies of the existing methods to measure the audit market competition level.(2)This paper expands the rare literature on auditor behavior at the branch level.Because of obtaining more accurate data at the level of branches undertaking audit services,this paper makes a more detailed investigation on the auditors’ response to the increased competition in the audit market in the areas close to customers.Although the literature also examines the impact of audit market competition on audit pricing and audit quality,it does not form a complete logical system.From the perspective of the spatial distribution of firms and branches,this paper first explores whether the degree of regional audit market competition will affect the stability of audit contract,and then constructs a complete theoretical framework of the impact of regional audit market competition on auditor behavior based on Porter’s five forces model.In addition,we divide the regional audit market firms and branches into three dimensions,explore the impact of different dimensions on auditor behavior,and provide empirical evidence for the future development direction of China’s audit market.(3)This paper alleviates the endogenous problem through a new instrumental variable,that is,the number of night lights in the province where the listed company is located,so as to provide reference for relevant research in the future.(4)This study has clear policy implications for the implementation of the filing system in the new securities law,the reform and development of China’s Securities Audit Market and strengthening the internal governance of accounting firms.The Chinese government has been committed to promoting the "bigger and stronger" of accounting firms and cultivating a benign competitive environment in the audit market.However,the firm’s extensive expansion has not realized the substantive unity between the general offices and branches,disturbed the competition order of the audit market,and is contrary to the original intention of "becoming bigger and stronger".This paper finds that reputation mechanism and industry supervision can effectively restrict auditors’ behavior.Therefore,after the implementation of the filing system,how to standardize the establishment of China’s accounting firm branches,strengthen the internal governance of accounting firms and give full play to the reputation mechanism and industry supervision of accounting firms is the key work of China’s audit market reform.