Does Reputation Improvement Motivate Auditors To Improve Audit Quality?

The Report of the Nineteenth National Congress of the Communist Party of China calls for the integration of supervision within the party and supervision by public opinion and other kinds of supervision.From the perspective of reputation,supervision by public opinion is to bring the mechanism of market and reputation into play.Due to the imperfect legal enforcement environment and the high cost of application of legal system,reputation mechanism is especially important to China's emerging market economy,which is constantly innovating.In recent years,on the one hand,Chinese government is committed to enhance the construction of ex ante incentive mechanism of auditor reputation and actively to encourage firms to translate into high reputation and large scale brand firms through the merge of audit firms.On the other hand,Chinese government vigorously implement the ex post supervision mechanism of auditor reputation punishment,strengthen the audit market supervision,and intensify the investigation and punishment of illegal cases of auditing.However,some studies have found that the ex post supervision mechanism of auditor reputation punishment is costly and has little effect,while the ex ante auditor reputation promotion mechanism has low cost,but existing research which expands based on the firm reputation level may be affected by self-selection problem of endogeneity and alternative explanation of the signing auditor's professional competence,which results in different,even contradictory conclusions.Therefore,the role of reputation mechanism played in audit market remains to be further explored.From the perspective of the personal reputation of the signing auditor,we take advantage of the change of signing auditor's reputation triggered by the event that CICPA(Chinese Institute of Certified Public Accountants)practiced assessment of the senior registered accountants to explore the impact of reputation enhancement of signing auditors on audit supervision qualityThis study finds that,reputation promotion of signing auditors will significantly affects the quality of auditing monitoring.When a common signing auditor without any political identity obtain "Senior Auditor" honor,he is more likely to issue modified audit opinions(MAOs)in the audit supervision process and the illegal events of supervised companies' decrease significantly,accruals quality improved significantly,while the corresponding audit fees do not increase.These results show that,as an informal system,the leading role of the signing auditor's reputation promotion mechanism in the audit supervision of governance of China's transition economic capital market is "Incentive" rather than "Rent-seeking",and this "reputation promotion incentive" is in accordance with the principle of cost-effectiveness.On the one hand,from the perspective of "ex ante incentive" mechanism of reputation promotion,this paper enriches the literature on how reputation mechanism affects capital market supervision and governance through providing convincing empirical evidence for the economic consequences of the regulation of capital markets brought by the reputation promotion mechanism of external auditor supervisors.On the other hand,this paper enriches the literature on informal system and corporate governance as well,and helps us to distinguish and deepen the understanding of function,mechanism and effect of different reputation mechanisms construction in market supervision,which includes ex ante reputation promotion and ex post reputation punishment mechanism.It has important reference value for government's regulatory organs to understand and develop the role of reputation,an informal system,in the improvement of corporate governance and maintenance of the healthy development of the capital market.