The Empirical Study Of Auditor Size And Audit Quality

Since the reform and opening up, significant progress has been made by the Chinese CPA profession. However, there is still a wide gap in the development between the global accountancy profession and Chinese CPA profession. In order to follow the pace of Chinese economic development and provide better support to the Chinese economic society, Chinese accounting firms are expanding their scale to enhance audit quality. On Oct 3rd.2009,General Office of the State transmitted the Proposals on Accelerating the Development of China's CPA profession, which is submitted by the Ministry of Finance. The document proposes that we should strive to cultivate 10 large international accounting firms with core competence, which can provide comprehensive services within 5 years. Then another merger fever struck the accounting profession.The relationship between Auditor Size and Audit Quality is still in controversy. According to Reputation Theory and Deep Pocket Theory, the larger audit firms could supply a higher level of audit quality. However, only when the reputation mechanisms and legal mechanisms are effective, can these theories be valid. The questions are that could larger audit firms supply a higher level of audit quality in China; could accounting firms offer higher audit quality by acquisition or combination. The current paper examines whether the audit quality is related to auditor size in China by using earning management as a surrogate for audit quality. The analysis finds that the discretionary accrual of global Big Four clients is statistically significantly lower than that of local Big Four clients and other local firms'clients; while, discretionary accrual of local Big Four clients is not statistically significantly lower than that of other local firms'clients. The results suggest that the audit quality of the global Big Four is higher than other firms, but the audit quality of the local Big Four is not higher than other local firms. In addition, we find that local accounting firms can supply a higher level of audit quality after acquisition or combination to some extent. The empirical results suggest that accounting firms could enhance audit quality to some extent by expanding the scale. However, to become the real "big" accounting firms, Chinese accounting firms should focus on the integration of resources and management after acquisition or combination, learn the successful experience from the global Big Four; Government should improve the related legal system to increase the auditor litigation risk; what's more, social forces should be encouraged to participate in the supervision.