Accounting Information Externality, Resource Control And Auditor Rotation Regulation

To construct the pattern of orderly auditing is one of the most important measures for regulatory bodies to promote transparency of accounting information disclosure and to protect the profit of investors, especially medium and small investors. Ordered auditing is drove by the evolution of induced and mandated institutions, but our social structure and special trust structure based relationship and the function definition of capital market oriented to political objection and on the basis of the background of planning for power operation are the two main constraint conditions for orderly auditing, and led to the development of CPAs have formed a path-dependent that its main characteristic is the control of clients'resource personalized. This characteristic highlights the predicament of property rights'damage and protection caused by accounting information externality that influenced by the factors such as accounting contract structure and the lag of rule by law.Thereby, based on the accounting information externality and the power-relationship structure of capital market, this paper analyzed the problem of auditing regulation theoretically and proposed some hypothesizes to be tested. This paper proposed the accessible path that re-allocation the control right of resource and the benefit of control right to build the accounting firm's core competence, because the control of client resource focused on firm conduces to the standardized of quality management and risk control and the formation of organizational capital and the creativity of human capital to be played. Auditor rotation regulation from external regulator is an important and convenient means that breaks down the barrier of control benefits and promotes information share and the building reputation.This paper, using the data of those listed firms that received clean audit opinions during 2001 to 2007 in the Chinese Securities Market, and measuring audit quality by the discretionary accruals calculated by the Cross-sectional Jones Model, investigates the relationship between rotation of signing auditors or firm mandatory rotation and audit quality. We find that, the rotation of CPAs is help increase audit quality; Firm rotation supplies new space for clients'earning manipulation amongst different years, that is to say, clients may underperformance before rotation by conservative accounting policy and over performance after rotation by radical accounting policy; there are some differences on the impact of audit quality between CPAs rotation and firm rotation. Such experimental evidences supply some suggestion value for the practice of auditing regulation of our country.