An Empirical Study On Contagion Effect Of Auditing Quality Of Accounting Firms

The audit report is an important part of information disclosure of companies.The purpose is to weaken the information asymmetry between market participants and listed companies,and to reduce the cost of information risks and ensure the quality of information disclosure.In the process of conducting the auditing business,the accounting firm and the auditor must ensure their independence and strictly observe the professional standards.Otherwise,audit failures can have a significant adverse effect on the effective operation of the capital market.However,after collating and analyzing the administrative punishments issued by the China Securities Regulatory Commission on the accounting firm's audit violations,we found that there are consecutive audit failures in many firms.For example,China Securities Regulatory Commission has issued seven administrative penalty decisions to Li Anda Certified Public Accounting firm since 2009,which included audit failures of Annual Report of Zhejiang Jiuhao firm from 2013 to 2015,Liancheng Orchid firm from 2012 to September 2014,and Saidi Media firm for 2012.This company had more than one audit failure in the same year,and successive audit failures occurred in consecutive audit years.What more need us attention is that other accounting firms such as Lixin and Shenzhen Pengcheng have similar phenomena.This leads us to think that a single audit failure is due to auditors' accidental auditing errors or whether there are some systemic flaws in the firm's auditing process? Whether a low-audit-quality business of an accounting firm conveys the quality of other auditing services also has a low quality? In other words,whether the low-audit quality has spread within the accounting firm horizontally and vertically?This article is based on the discussion on whether the auditing firm's low audit quality presents a systemic contagion characteristic.There were relatively little domestic and foreign research on the contagion effects of low audit quality,and the existing literatures mainly focused on the research of business branches.However,in fact,the whole accounting firm acts as the responsible party for the auditing business contracts who bears the audit risk and shoulders the responsibility for quality control of the entire business.Therefore,this article will be analyzed from the perspective of the whole accounting firm.This article selects the A-share listed companies in the Shanghai and Shenzhen Stock Markets as the research subjects from 2003 to 2016.It empirically tests whether the low-audit quality of accounting firms has horizontal and vertical contagion effects,and on this basis,proposes rationalization proposals to promote audit quality of the firm.In the further analysis,the reputation of the accounting firm was also included in the scope of this study to examine whether the firm's reputation has the suppressive effect of low audit quality.The results of this study indicate that there are indeed horizontal and vertical contagion effects of low-audit quality within the accounting firm.That is to say,if a low-quality audit report appeared in the audit year within an accounting firm,then the other company's annual reports audited by this accounting firm in the same and subsequent years also have low-quality features.Within the firm,reasons that auditors are affected by the behavioral diffusion mechanism of social network effects or invalid internal quality control system,which can lead to a systematic reduction in the auditing service quality of the firm,and this adverse effect will continue to play a role in subsequent years.In addition,reputation does have a significant impact on the auditing quality of accounting firms,and a high reputation helps improve audit quality.However,the inhibitory effect of reputation on the contagion effect of low audit quality has not been supported by empirical results.The research conclusions of this paper provide academic support for the overall improvement of the audit quality of accounting firms and the supervision agencies' timely supervision of low-audit quality firms.