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Empirical Evidence On The Auditor Size And Audit Quality In China

Posted on:2008-01-03Degree:MasterType:Thesis
Country:ChinaCandidate:W KangFull Text:PDF
GTID:2189360215952039Subject:Accounting
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Recently, accounting service market has opened widely because our country joined in the WTO in 1997.Then, it will be even fiercer for the audit service market. After we join in the WTO, it need support transnational services as WTO members are characteristic of cross-border capital flows, as well as outstanding representatives of China's listed companies to integrate with the global economy. International accounting firms competition in the market by virtue of its abundant experience in facilitating good reputation and quality of service, internal audit services in market share will increase dramatically. The audit companies are too small in China, so they are more difficult to cope with international competition and economic development. In order to enhance their competitive strength, our audit companies need to strive to create excellent brand and merge to increase the size of firms. On September 29 in 2006 China Association of Registered Accountants promulgated the "Regulations on accounting firms to promote the bigger and stronger (draft)." ZhuXie will actively support offices become the bigger and stronger, and then foster the development of transnational operations of 10 to become a comprehensive international professional services firm. In this context, we use of newer data on the scale of the same things as the relationship between the theoretical analysis of audit quality and Empirical Analysis. We draw the conclusions that the size of the CPA firms and audit quality are interrelated, and then give some suggestion to promote enlarging the size of the CPA firms. Four parts are as follows.In the first part, we review the literature over audit quality. We find that there is difference in audit quality between big auditing firms and small auditing firms in the developed countries such as USA. We review the literature on Reputation Theory , Lawsuits and so on. However, such difference exists on the base of a series of serious hypothesis, including free competition in audit market, effective audit regulation, enough audit risk, and free information among audit clients. While the CPA profession in China is developed for a short time, the normalization auditing market does not exist. So, there is not condition though which difference existed in Chinese audit market. That is to say, whether audit quality of big auditing firms is higher or not in China in the current condition is needed to be tested. In this study, we examine whether the ERC differs between Big Four and non- Big Four audited firms.In the second part, we analyze the audit quality in the aspect of the theory. We use Principal-agent theory, Signal Transfer theory and Asymmetric Information to analyze why we think that auditor size is correlated with auditor quality. And based on the theoretical analysis we give the assumption in the relevant paper.In the third part, we explain sample selection criteria on the matched-paired sample and the switch sample. How to calculate UE and CAR; We then introduced the control variables, dummy variables for the selection of indicators reasons. At last we discuss the options window. In the empirical test, we estimate a cross-sectional multiple regression model of abnormal stock returns on a measure of earnings surprise using ordinary least squares explanatory variables included in the regression equation control for other determinants of the ERC that have been identified in previous studies. Consistent with the joint hypotheses, we find that the ERCs of Big Four clients are statistically significantly higher than non- Big Four clients. The result obtains in both a matched sample of firms according to industry membership, and a switch sample of firms grouped according to shifts from and to Big Four and non-Big Four auditors.In the last part, upon examination of the discretionary accrual of firms listed on the Chinese Stock Exchange we find that the big auditing firms have better audit quality than the small ones. Then we provide some ideas on how to enlarge the size of the CPA firms. This paper proposes to set up monopoly structure in auditing market on listed company and summarizes some ways and operational problems.
Keywords/Search Tags:Empirical
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