A Study On The Impact Of Transformation Of Accounting Firms' Organizational Form On Audit Quality Under Different Institutional Environment

Independent audit has played an important role in the development of capital market and the protection of investors. Moreover, the quality of independent audit has been the focus of academic research among domestic and abroad scholars. The quality of independent audit may be affected by multiple factors, such as institutional environment, characteristics of accounting firms, characteristics of clients and so on.The author takes discretionary accruals as an alternative measure of the audit quality.The author also takes advantage of the Cross-Sectional Modified Jones Model to investigate the relationship between the system transformation of accounting firms and the audit quality, and further examines how the superior or inferior of institutional environment in China affects them, taking consideration of our national conditions.The result of this paper indicates that for both large domestic accounting firms and Sino-foreign joint-venture accounting firms, after the forms are transformed into limited liability partnerships, their audit quality have been significantly increased and the restrain ability to clients' earnings management is greatly enhanced. For accounting firms taking the lead in completing the system transformation in 2011, the impact of changes in organizational forms on their audit quality has a hysteresis to some extent. However, for accounting firms completing the system transformation in2012, their audit quality has been significantly improved soon after the system transformation. Grouping test that taking consideration of the institutional environment differences among domestic cities shows that, when the institutional environment is good, the change of organization form has a more obvious effect to enhance audit quality to a great extent; when the institutional environment is poor,although the change of organization form has an effect on audit quality, the improve is not so great or notable. Therefore, the author believes that in order to draw on strengths from the limited liability partnerships, in the future we should further establish a sound supporting system, make clear the defining standards of intent,negligence or gross negligence, establish a personal property registration system for partners, and improve the system to protect interests of creditors. Considering the differences of the audit quality improvement brought by organization form change under different institutional environments, we should strengthen the system environment to narrow the environmental system gap between regions, includingraising the level of legal development, improving the legal environment, accelerating the process of marketization, and utilizing government's oversight authority reasonably.