Study On The Transmissive Mechanism Of Auditor Size, Industry Specialization To Audit Quality

CPA audit is an important external supervisive mechanism to solve the problemof Information Asymmetry, audit quality determines the effect of CPA audit. As avital development strategy for accounting firm, industry specialization is importantto improve audit quality. Industry specialization is determined by both industrycharacteristics and accounting firm itself. Recent years, following the Bigger andStronger policy by CICPA, our country’s accounting firms are becoming muchbigger at scale by mergers and acquisitions. Auditors of different size have differentlevel of industry specialization, thus leading to various level of audit quality.Therefore, it is not only a significant theoretical question but also a practicalquestion to expanse and strengthen accounting firm and develop industryspecialization.By collecting data of China’s listed companies from2010to2012in Shanghaiand Shenzhen stock markets and method of both normative and empirical research,this paper studies the transmissive mechanism of auditor size, industry specializationto audit quality. The empirical study measures the auditor size by accounting firm’sannual income, the level of industry specialization by Industry Market Shares andaudit quality by absolute value of discretionary accruals. We find in the empiricalresearch that in our country auditor size is positively correlated with audit quality,auditor size is positively correlated with industry specialization and industryspecialization is a mediator between audit size and audit quality, which is inaccordance with theoretical analysis and assumptions. However, the industryspecialization is an absolute mediator, which is not in accordance with theoreticalanalysis and assumptions. The reason to explain the result is that Chinese small-sizeaudtitors’ independence level is not high and it leads to the results that industryspecialization is an absolute mediator between auditor size and audit quality as awhole and there is no relation between auditor size and audit quality for small-sizeauditors specially. Consequently, we suggest that in order to offer necessary securityfor stock markets our countries’ accounting firms should keep expansing, developindustry specialization and improve independence level.