Is Auditors' Reputation Mechanism Effective?

Some overseas studies have shown that auditors will therefore suffer economic losses when the reputation of the auditor is damaged. In order to investigate the problem whether the stock market of china had a similar punishment effect, this article will study whether the auditor's reputation mechanism is effective after the punishment mainly from market share and audit opinions. We mainly concern the audit firms disclosed in the "administrative penalty decision" by Chinese Securities Regulatory Commission and are also of the top 100 based on the AICPA from 2002-2006.Not only the punished firms, but the certified public accountants are involved. We mainly study whether the number of customers reduces and whether auditors will strengthen self-discipline with the decline in the auditor reputation result from the punishment. And fatherly we will investigate whether the supervision is stronger and effective in order to evaluate the role of auditor punishment in the government supervision system. At last this article will study the effectiveness of government monitoring, analyzing their causes and propose relevant policy recommendations.In the process of conducting empirical research, this paper selected the three years before,after punishment and the year that the audit firms are punished as the observation period. Based on the period we collect the A-share listed companies as research samples to investigate the change of the punished audit firms'market share and the modified audit opinions. The results showed that the auditors' market share has not decreased after the punishment; the number of customers is still on the rise, which indicates that the punishment of Commission has not substantially affect the company from the clients' choice. But the study also found that:auditors tend to issue more modified audit opinions after the punishment, the auditor independence improved in some degree. The punished auditors tend to issue less modified audit opinions than the unpunished ones in the three years before punishment. For the punished auditors, they tend to issue more modified audit opinions after punishment, which indicates that, the SFC did have some active role in improving the audit independence.