Economic Cycle,Audit Quality And Credit Financing

Independent audit, as a paid appraisal activities, is what CPA legally entrusted to do the financial statements and related information appraisal work. Auditee is auditors’ remuneration source and also the examined object, therefore, in practice audit quality is largely depends on negotiation outcome between auditor and auditee. In this trade-off process, risk of loss customer and risk of audit failure are the auditors’ major considerations, while both the above two kind risks can be affected by economic cycle, through which, economic cycle could influence audit quality. On the other hand, as a reasonable assurance of the quality of accounting information, independent audit play an important role in the capital markets. While be affected by the economic cycle, the audit quality can also influence the economy because of its fluctuation and the amplification effect of financial accelerator. It is still little research to investigate the relation between Macro-and micro-economic relations in this area, so we will discuss the relationship between economic cycle, credit costs and audit quality this paper, in order to make up for this gap.This paper first reviews the relevant literature and makes the comments. Based on this, on one hand, we discuss the path economic cycle affects audit quality and the impact of audit firm size. Then we hypothese that economic cycle could affect audit quality and big auditors provide different kinds of quality in economic cycle. On the other hand, from the financial accelerator theory we analyze audit firm size’s asymmetric influence on corporate finance and the difference between State-owned and private enterprises. Then we give the hypothesis that auditor would exert larger affect on corporate finance in the stage of economic declining and it would be more obvious on private enterprises.Based on the theoretical analysis, we empirical test the four hypotheses about the economic cycle, credit costs and audit quality, by using the data of the public listed companies in Shanghai and Shenzhen stock from 2002 to 2012. About economic cycle’s impact on independent audit, We find that the discretionary accruals are higher in the stage of economic declining and big auditors more affectively restrain earnings management behavior. About independent audit’s economic consequences, We find that in the stage of economic declining, companies which employed big auditors encountered relatively higher financing costs and tighter financing constraints, and it becomes more obvious on private enterprises.Comprehensively, economic cycle could lead to fluctuations in audit quality, while most auditors allow more discretionary accruals in the stage of economic declining, big auditors restrain earnings management behavior more affectively; Audit quality fluctuations of different size auditors in economic cycle deserve the economic consequence that companies which employed big auditors encountered more constraints in credit market. The interaction between economic cycle and independent audit may at last add to economic fluctuations.Overall, this paper put the macro-economic cycle issues, credit costs and micro audit quality, together, expanding the traditional financial accelerator theory and audit theory. Also, the empirical results of this paper can provide a theoretical support for decision makers in capital market and the government departments in implementing policies. Therefore, the results of this paper have a positive significance for both future theoretical research and also practical activities.