The Effect Of Audit Firm Size On Audit Quality

The relationship between audit firm size and audit quality has been received extensive attention of scholars and regulators. Many foreign studies have shown that the effect of firm size on audit quality is positive; but in our country, the effects of firm size on audit quality are still controversy. With the gradual development of the audit market, the relevant government departments also continue to strengthen the firm’s regulatory and legal punishment to ensure a sound legal environment. Based on our audit industry’s competitive environment, government issued documents, which hope accounting firms can do "bigger and stronger" and improve competitiveness. In our government "bigger and stronger" background, how accounting firm size affects audit quality? Whether the impact of firm size on the different types of alternative indicators of audit quality is consistent or not? These questions need to be further investigated.This paper uses a combination of normative and empirical method to research. Firstly, based on the review of the literature about audit quality, the alternative indicators of audit quality are divided into the actual audit quality and perceived audit quality. Combined with domestic researches, this paper identifies the questions to study. Secondly, combined with economies of scale theory, signaling theory, reputation theory,"deep pocket" theory, product differentiation theory, the paper analysis the impact of firms size on actual audit quality, corporation perception of audit quality and investor perception of audit quality, based on which to get our corresponding assumptions. Finally, Based on China’s securities market data from2010to2012, research hypothesis can be tested. This paper also make relevant policy recommendations based on the results.This article includes the following six areas:Chapter1, Introduction. Introduces the research background, significance, research ideas and methods, and are given the overall framework of the paper in graphical form.Chapter2, Literature Review. From the division of firm size, definition and measure of audit quality, the impact of firm size on audit quality, three aspects to summarize, the literature reviewed, and the research questions of this paper.Chapter3, the Theoretical Analysis and Hypotheses. Combined with economies of scale theory, signaling theory, reputation theory,"deep pocket" theory, product differentiation theory, from the firm size on actual audit quality, customer perception audit quality, investor’perception of audit quality to analysis and propose hypotheses.Chapter4, the Study Design. First, consider the measure of firm size, defining large firm every year. Secondly, from the firm size on actual audit quality, customer perception audit quality, investor perception of audit quality, respectively, introduce variable definitions and model interpretations, and sample selection and data sources.Chapter5, Empirical Testing. It includes descriptive statistics, correlation analysis, regression analysis and robustness tests.Chapter6, Summarizes. It includes the empirical results and appropriate policy recommendations for the conclusion of the study, the contribution, limitations and future research proposals.This paper study the effects of firm size on the actual audit quality from the perspective of earnings management, on the client’perceived audit quality from perspective of audit costs, and on the investor’s perceived audit quality perspective of earnings response coefficients. Conclusions are:(1) Compared to the "small firms","large-scale firms" audit clients’discretionary accruals are significantly lower;(2) Compared to the "small firms","large-scale firms" audit clients get more recognition, and thus can charge higher audit fees;(3) Compared to the "small firms"," large-scale firms’investors should be able to get more recognition, leading to higher earnings response coefficients.The innovation of this paper mainly reflects in the three followings:First, due to the measure of audit quality are diverse, this paper reviews the existing research at home and abroad to divide audit quality into the actual audit quality, the perceived audit quality, and try to build a framework for audit quality measured.Secondly, this paper takes date from2010to2012as the object. Considering the single condition classification may exist certain differences, this paper chose to use cluster analysis to divide the scale of firm. This paper studies the impact of firms size on audit quality from the actual audit quality, client’s perceived audit quality, investors’perceived audit quality, testing various forms of audit quality is consistent or not.Finally, By adopting the clustering analysis, it is concluded that the number of large accounting firm in2012is higher than that in2011and2010, reflecting the third wave of consolidation’effects.In the background of the third wave of consolidation, the impact of firm size on audit quality can provide a foundation of the development of large-scale firms.