The Influence Of Accounting Firms’ Conversion On Audit Quality

Since 2010, in order to implement the policy of "The notice circulated by the State Council about some opinions from the Ministry of Finance about accelerating the development of China’s CPA industry" and encourage large and medium sized accounting firms to adopt the organization form of limited liability partnership, the government has promulgated a series of policies, such as "The interim provisions on promoting large scale accounting firms adopt the organization form of limited liability partnership", "Localization scheme of Sino foreign cooperative accounting firms", "The notice on the adjustment of accounting firms applying for securities qualifications condition". These policies were expected to promote large and medium sized accounting firms to switch the organizational forms from limited liability company to limited liability partnership. Until now, all the accounting firms with securities qualification have completed the work of switch. To test the influence of the policies have on audit quality, the paper chose the Shanghai and Shenzhen A-share listed companies, which were audited by the 41 reformed accounting firms between 2009 and 2013, as the sample, and measured the audit quality with audit opinion, earnings management, earnings response coefficient and audit fees as substitution variables. The paper tried to explore the impact of switching auditor organization forms on audit quality. Research found that after controlling the influence of other variables such as audit subject, audit object, and audit environment, switching auditor organization forms had no significant effects on audit opinion, had negative effect on earnings management, and had positive effect on earnings response coefficient and audit fees. The results illustrated that, after the transformation, the accounting firms indeed play a more important role in the inhibition of earnings management, the audit clients’ profit reaction had more relevant relationship with market value, and accounting firms preferred to charge higher audit fees. Firms transformation were carried out in batches, in order to eliminate its influence, the paper had further research. Research found that after the first two batches firms finished their switches, the audit quality had no significant improvement, however, with the last two batches finished their switches, the audit quality improved remarkably.