| In practice, Chinese audit firms almost choose Limited Liability Company as their organizational form, although the CPA law provides partnership or LLC. On July,2010, the Chinese ministry of finance(MOF) issued the "Interim provision on encouraging large and medium-sized audit firms to adopt special partnership(SP) as their organizational form", claiming that large CPA firms change organizational form to special partnership before December31,2010and encourage medium-sized audit firms finish reforming before December31,2011.On January,2012, MOF, China Securities Regulatory Commission(CSRC) jointly announced "Adjustment the application conditions on securities qualified CPA firms", which stipulated that one of the conditions of audit firms engaging in securities and futures, the CPA firms’ organizational form must be partnership or special partnership. In order to continue to have a special license to audit listed companies, audit firms have to reform their organizational form from Limited Liability Company (LLC) to special partnership. In this case, audit firms change their organizational form one after another.Specifically, SP requires audit partners who are convicted of grave negligence or willful misconduct to assume unlimited liabilities for the firm’s unpaid debts, while limiting the liabilities of other (innocent) partners to their contributions. All audit partners undertake unlimited liabilities or unlimited joint and several liabilities if partners are not convicted of grave negligence or willful misconduct. From the theoretical level, the change from LLC to SP will expose individual auditors to greater risks of litigation; auditors will remain independent and pay more effort to avoid risk which will translate to higher levels of audit quality. However, the litigation risk is very low in China. Does the forced reform come with the improvement of audit quality?In this paper, we measure audit quality by discretional accruals, accounting conversation and earnings response coefficient to examine whether the reform of CPA firms significantly improve the audit quality, using the reformed six audit firms from2009to2011. This article does the research with one year time window from vertical angle, and at the same time compares the audit quality of all firms the year reform happened to see whether SP enhances audit quality. Our regression results can be summarized as follows:(1) Our finds is that no consistent evidence supports firm after reform with high audit quality, during time window of a year before and after the six CPA firms organizational change. Only in ERC measurement model, the results show that firms audit quality improved. There is no consistent evidence support our hypothesis that the change of audit organizational form can affect audit quality in Basu (1997) accounting conversation model and discretional accruals model.(2) This paper studies the effect of audit firms’organizational form changing from LLC to SP from the cross section. In the absolute discretional accruals as audit quality proxy, no matter in the full sample or considering the direction of earnings management, we find the reform have no significant effect on audit quality. In contrast, there is a significantly negative effect on audit quality in Basu (1997) accounting conversation model after controlling several variables. The result of ERC model also implies the reform can’t significantly improve audit quality.To sum up, the change of audit firms’organizational form from Limited Liability Company to special partnership has no significant effect on audit quality. To this, we think the possible reasons as follows:Chinese CPA industry redevelops just thirty years, litigation is not perfect enough; as the low efficient civil litigation, investors often wait a long time when they file a lawsuit for compensation and their self-protection is not strong by legal way. In addition, the time audit firms finish to reform is short, some measurement of the internal control and quality reexamine are to be perfected.The contribution of this paper is as follow:we enrich the researches related to studies about CPA firms’organizational form from empirical view and inspect the reasonability of the governmental policy. This paper use three methods (absolute discretional accruals, accounting conversation and earnings response coefficient) to measure audit quality, in order to eliminate the results sensitive to single variables. Last but not the least, we not only studies the effect of reform from vertical angle, but also from the cross section. |
