The Contagion Effect Of Low Quality Audit Among Individual Auditors

In China,audit reports are signed by two chartered accountants who holds limited responsibility for audit reports.The supervisory organization will take punitive measures to both CPA firms and related signing auditors.In practice,one audit engagement is led by a signing auditor(for up to 5 years)who is also involved in other engagements.The interactions of such audit engagements through this identical auditor draws our attention where this may present some contagion effect.We may refer to the epidemiology and see one low quality audit as a source of infection which can be contagious via some certain media.This thesis first elaborates the background of audit service,which originates from the theory of information asymmetry and the principal-agent theory.We then investigate the impact of individual auditors' characteristics on the audit quality.Based on the empirical analysis,we find that low audit quality is contagious among individual auditors.One auditor may fail other engagement if he or she has previously failed.And the regression results shows that specific to those who has low quality audit,the contagious effect is more significant when the auditors have lower degree or non-audit/accounting related major.The thesis reveals the significance of individual auditors' characteristic in the contagion of audit failure,and also shed some light on the progress of the supervisory mechanisms for market regulators.Our thesis adopts normative analysis and empirical analysis.Firstly,we study the phenomenon of contagious low quality audit among individual auditors.Then we testify the relationship between the personal characteristics(age,sex,graduate school,degree,major etc.,)of individual auditors and the contagion effect.The empirical part uses the data from Wind,which includes all the A share companies whose financial reports are audited by Big4 CPA Firms during the period from 2007 to 2013.The empirical result is in line with our assumptions.Our article includes five sections:Section 1 opens with the introduction of research background and research significance,research route and methodology.It summarizes the overall framework of this article by a flowchart.Section 2 is the theoretical basis and literature review.Based on the theory of information asymmetry and principal-agent theory,we elaborate the rationale behind the existence of audit services.We review the past papers on audit quality and its determinant,and study the relationship between individual auditors' characteristics and audit quality.We note that past literatures on the contagious effect of low quality are mostly focused on CPA firm level,while individual level research is by far very limited.We then propose the purpose of our thesis,by setting out three assumptions in section 3.Section 3 sets out the assumptions for our empirical analysis,based on the review of past literatures.The three assumptions are focused on the impact of individual auditors'characters on the contagion effect of low quality audit.Section 4 elaborates the empirical test on the assumptions made in section 3.It explains the rationale of sample choosing,definition of variables,and model of regression.The tests includes descriptive statistics,correlation analysis,multiple regression and lastly robustness check.Secion 5 concludes the thesis with some policy implications.Based on the theoretical analysis and empirical tests in the previous sections,we find the impact of the characters of individual auditors on the contagion effect of low quality audit,and provide some suggestions to constrain such contagion.It also gives the limitations of this thesis,which is due to the lack of complete data and some assumptions being too rigid.The contributions of this article includes:1.We study the exogenous and endogenous factors which may influence the audit quality.Given the institutional circumstances in China,we should pay more attention to the individual auditors' level when determining what the contagion effect;2.Our article complement the range of research on the contagion effect of audit quality,especially on the contagious behaviors among individual auditors;3.Our finds may be useful for regulators to improve the supervisory mechanism.