Audit Firm Merger, Quality Control Of Audit And Clients’ Demand For Auditing

The third merger wave of audit firm began in2007. This merger wave occurred indomestic is not only because of marketization，such as to access to other local auditmarket through merger with the local audit firm，expand the scale in order to improvetheir own competitiveness，and to enlarge the market share，but also because ofadministrative guide. The administrative guide including the related entry thresholdwhich is improving all the time，such as audit qualification of H share，Securities andthe large state-owned enterprise.The average proportion of domestic non-top ten clients who changed auditorswithin two years after the merger was8.97%，higher than the average proportion ofmarket during year2007-2009. In addition，the audit firm merger will reduce itsdependence on specific clients and improve its independence. The scale effect broughtby merger will also help to enhance audit efficiency and audit techniques，therebyimproving the ability of discovery the accounting problem in client financial statements.So the audit firm merger will improve audit quality. By discussing and researching thecause of auditor changes under this circumstance，in one hand we can test the effect ofthe merger，in the other hand we are able to know the characteristics of client’s auditdemands，especially the need for high-quality audits.The explanations for a lack of post-merger management and cultural congruence，client-auditor realignment and flight from audit quality may account for the reason whymore clients change auditor after merger. This paper selects all the domestic non-BigTen as research samples which were merged into the domestic Big Ten during2007-2009. By researching the causes of these samples’ auditor changes following theaudit firm merger，we can understand the congruence process of relationship betweenaudit firm and listed companies and put forward the supervision suggestions，so as tomake up for some shortage of existing research in our country and enrich or improve theaudit theories in our country.In order to research the reason why clients change audit firm after merging，thispaper establishes hypothesis and model for empirical analysis from four aspects，including client structural characteristics and its changes，the audit firm’s post-mergerclient portfolio management practices，earningsmanagement level，and client incentives to save on audit fee. First of all，clients who have large size，high asset growth or highfinancing demand tend to choose Big Ten，while customers who have small size，lowasset growth or low financing demand are more inclined to change to non-Big Ten.Secondly，the high risk clients are more likely to change to non-Big ten after themerger，and clients who change auditor are more risky. This suggests that auditor firmsare more cautious after merger. Thirdly，clients who changed to the non-Big Ten aftermerger have the similar level of earningsmanagementwith clients who changes toanother Big Ten，but are higher than clients who do not change. Clients who changed tothe non-Big Ten after merger have the similar level of earningsmanagementbefore andafter change. Clients who do not change after merger also have the similar level ofearningsmanagement before and after merger. This indicates that clients have higherearnings management level are more likely to change after merger and auditor firmsimprove its audit quality by declining clients who have high earnings management level.Finally，the audit fee are similar between clients who change to the non-Big Ten，do notchange and change to another Big Ten. Clients who do not change after merger have thesimilar level of audit fee before and after merger. Clients who changed to the non-BigTen after merger also have the similar level of audit fee before and after change. Thisdemonstrates that audit fee is not the clients’ most concerned.According to the research，our conclusions are including three aspects. In the firstplace，our evidence does not support that the large loss of listed clients was primarilyattributable to audit fee saving. Rather，the evidence is more consistent with the flight ofsome listed clients from high-quality audits. In the second place，clients who do notchange suggest that the audit demands of listed company are sometimes financingdemand in our country. In the third place，audit firm merger are strengthening the auditquality control and more cautious about high risky clients. This makes the firmachieving the effect of merger to a certain extent. According to our paper，we have somepolicy suggestions for regulators. Firstly，strengthening the regulation of audit firmchange disclosure. Secondly，strengthening the supervision of audit quality aftermerging. Thirdly，improving the procedures of dismissal of auditor firm by the listedcompanies. Finally，paying more attention to the listed companies who change to smallfirm.