Revolving Door And Audit Quality

Revolving door is the phenomenon that an auditor transforms between the accounting firm and the audit client. This phenomenon has aroused widespread concern of many scholars and legislators. However, existing research does not reach the same conclusion for the relationship between revolving door and audit quality.The article employed theoretical analysis and empirical testing the relationship between revolving door and audit quality. Using audit opinion improving and discretionary accruals profits as alternative variables of audit quality, the article found revolving door companies can improve their audit opinion, and increase the degree of discretionary accruals profits, that is, revolving door decrease audit quality. But this conclusion may also be due to the revolving door corporate having lower audit quality, that is, there may be endogenous phenomenon. To exclude the situation that revolving door company audit quality was original relatively low and overcome the possible endogenous, the article used change model of the revolving door and the changes of discretionary accruals profits, then, the results are stable and unchanging. Considering the accounting professional skills of executives of revolving door companies may have impact on the conclusions, we further limited the sample to the company having executives who had auditors work experience. We found the results did not change. In other words, the revolving door is indeed reducing audit quality in China’s capital market.Related researches indicating that effective corporate governance mechanism can improve audit quality, this paper further puts attention to an important part of the corporate governance mechanism-Audit Committee which is closely related to external auditors in external auditors’appointment, change, communication, and internal control disclosure and whether it can mitigate revolving door damage to audit quality. The results show that the companies setting up audit committees, the more members of the audit committee, and the audit committee more independent can more likely to inhibit the revolving door damage to audit quality, and the conclusions also show that audit committee plays a proactive role to a certain extent.Based on these conclusions, the article further proposed some policy recommendations:strengthening the independence of certified public accountants, strengthening the information disclosure supervision of the work experience of the directors, supervisors and senior management, and improving of the audit committee system in China.