Does Random Inspection Supervision Improve Audit Quality?

The modern capital market is an information market,and information is the basis and life of capital market.The significance of independent audit lies in improving the credibility of accounting information.However,considering the fact that Ruihua CPAs and BDO CPAs have been penalized by the CSRC in recent years,the practice level of accounting firms in China is not sufficient to make reasonable assurances on the credibility of accounting information.Therefore,it is particularly important whether the practice inspection carried out by the Ministry of Finance Supervision and Inspection Bureau,CSRC Accounting Department and CICPA can effectively improve audit quality.At present,scholars have only verified the effectiveness of the CICPA practice quality inspection and risky engagement interview program.It is still necessary to conduct research on effects of other entities' specific regulatory systems in order to better answer the effectiveness and possible improvement of the audit industry's “trinity” supervision system.In 2016,the CSRC carried out “Double Random” inspection on accounting firms,that is,the CSRC randomly selected inspection targets and inspectors to inspect the practice quality of accounting firms.Since then the CSRC has formed a regular system for inspecting the auditing firms' practice quality.This system provides a natural experiment for the study of the net impact of the CSRC's regulatory behavior on the auditing firms' practice quality.This paper takes the annual report data of A-share listed companies in China from 2015 to 2016 as the starting point,and obtains the final sample by pairing.It distinguishes the treatment group from the control group based on whether accounting firms are inspected by the CSRC or not,and constructs a DID model to test the effect of the system.The research findings in this paper are as follows:(1)The random inspection by the CSRC can effectively improve audit quality,which is reflected in the reduction of absolute value of performance-adjusted discretionary accruals,the reduction of annual change of the audit reporting aggressiveness and the increase of tendency to issue modified audit opinion.(2)The improvement effect of the system on audit quality mainly exists in non-big4 accounting firms.(3)The improvement effect of the system on audit quality mainly exists in the high importance customer group with independence risk incentives.(4)The improvement effect of the system on audit quality mainly exists in the high-risk customer group with more judgment-based decisions.This paper argues that there is a short gap between the implementation of random inspection by the CSRC and the issuance of audit reports by auditors,so auditors' professional competence is relatively fixed,and the system will improve audit quality by improving audit independence.While the incentives and judgmentbased decisions are two factors of the independence risk,the former will weaken independence and the latter will increase the likelihood of low independence resulting in low audit quality.So the conclusion(3)and(4)can be summarized as the improvement of audit quality mainly exists in the high independence risk customer group.This paper provides theoretical basis and empirical evidence for the improvement effect of CSRC random inspection system on audit quality,and indirectly verifies its possible way of functioning.Based on this paper and related researches,the CSRC is supposed to continue to carry out the system effectively,improve the professionalism of inspectors,increase the inspection intensity and strengthen the application of inspection results.When each regulator of the audit industry has its own regulatory effect,they should strengthen communication and cooperation,avoid waste of regulatory resources,and improve regulatory efficiency and effectiveness.