Research On The Audit Failure Of REANDA And The Effectiveness Of Auditor Reputation

Auditor reputation is the resource which generates from a long-term game between CPA firms and information users. It's the synonym of audit quality, also an important condition for the survival of CPA firms. In this thesis, we discuss the case of REANDA and Huayang Technology by using the method of event study from two angles, the stock market and the audit market, to test whether auditor reputation matters. From the point of stock market, we select the event day when Huayang Technology was initiated an investigation and REANDA was punished by the Commission. Then calculate the average cumulative abnormal return. Through further regression analysis we find that the greater likelihood of bankruptcy, the more intense of market reaction, and the more important customer, the higher audit quality is provided by REANDA. From the point of audit market, it's obvious that the rank of REANDA is dropping year by year by comparing the statistics of rank, revenues, the number of CPA and the number of customer from the year 2007 to 2013. Besides, the number of CPA and the number of customer are both in an inverted U-shaped, and showing a falling trend after Huayang Technology event. By using Logistics Regression Analysis, it is summarized that the opinion and fee from the original auditor REANDA are not the factors for the sample companies to change auditor.In conclusion, the test results of stock market and audit market show that auditor reputation are effective for local CPA firms in China. Therefore local CPA industry needs to give full play to the effectiveness of auditor reputation in order to promote the healthy development of the industry. The effectiveness of auditor reputation needs audit service suppliers and demanders and regulators joint efforts.