Research On The Effect Of Audit Failure On Office-level Audit Quality

With the rapid economic development of China's capital market and the "bigger and stronger" policy initiated by Ministry of Finance for local accounting firms, the number and size of audit offices are constantly growing, and the proportion of office-level audit is also expanding. The existing audit quality study is almost based on firm-level, however, audit quality of a whole accounting firm is not homogeneous, so office-level is the more realistic study unit than firm-level. Audit failure is extremely low-quality circumstances of audit, and there are not short of punishment cases by SEC because of firm-level or office-level audit failures. Needless to say, audit failure reflects low audit quality of those accounting firm or office, negatively affecting their reputation and market competitiveness. Furthermore, the firm-level audit failure would have what kind of impact on office-level audit quality in the next year? And the office-level audit failure would have what kind of impact on it self's audit quality in the next year?Guided by the two issues above, the paper based on the theory analysis frameworks of organizational culture theory, principal-agent theory and operant conditioning theory, using a sample of Chinese A-share listed companies for the period 2011-2014, which respectively focuses on firm-level audit failure and office-level audit failure how to impact office-level audit quality in next year, that is, competitive effect or contagion effect. The study found that firm-level audit failure is positively correlated with office-level audit quality in the following year, which indicates that firm-level audit failure has competitive effect on office-level audit quality, which means the office-level audit quality becomes better after firm-level audit failure; office-level audit failure is positively correlated with the same office's audit quality in the following year, which indicates that office-level audit failure has competitive effect on office-level audit quality, which means the same office's audit quality has been improved after firm-level audit failure. Based on these results, the paper suggests further promoting the "five reunification" process between accounting firm and audit office. Furthermore, except the outer industry regulator, the paper suggests correcting bad practice of auditors during audit work and improving audit offices'internal governance by means of firm-level and office-level quality control mechanisms as well as cultural construction, and thus serve to improve the quality of the audit office, and also promoting our local accounting firm becoming "bigger and stronger".