An empirical study of audit quality in China from the perspectives of regulators and the accounting profession

In this thesis, I first evaluate audit quality directly through an examination of the cases of audit failure that have been discovered by the Chinese regulator, the China Securities Regulatory Commission (CSRC). I attempt to show the extent to which the regulator perceives auditors to be responsible for their failure to detect fraud. Then I use auditor independence as a measure of audit quality to investigate two specific factors that drive auditor independence from the perspective of the accounting profession. I hypothesize that regulatory sanctions serve as an incentive to improve auditor independence, and further posit that the organizational form of CPA firms affects the independence level of auditors.; The empirical results indicate that audit failures that involve material misstatements by clients are more likely to lead to enforcement actions against auditors than disclosure fraud. Misstatement fraud that involves accounting earnings is more likely to lead to enforcement actions against auditors than misstatement fraud that involves balance sheet figures. The results reveal a strong association between several types of fraud and audit failures from the regulator's perspective. To examine the factors that drive auditor independence, I use the issuance of modified audit opinions as a proxy for auditor independence, and demonstrate that sanctioned auditors act more independently after being subject to regulatory sanctions and that CPA firms that are registered as partnership firms are more independent than firms that are registered as limited liability firms. This implies that formal regulatory sanctions and the organizational form of CPA firms are important drivers of auditor independence and audit quality in China.; Overall, the results make several contributions to regulators, the accounting profession, and academia. First, the analyses on audit failures provide direct and useful information for the improvement of audit quality. In particular, regulators and the accounting profession can make use of my findings in their policy making. Regulators and policy makers may consider devising new accounting and auditing standards to govern substandard audits to detect specific types of fraud. The accounting profession may also consider providing technical training for staff to identify various prominent types of fraud. Second, the evidence of an improvement in auditor independence that is motivated by regulatory sanctions implies that formal sanctions serve as an effective deterrent to the unethical behavior of auditors. This result supports the view that more resources should be devoted to regulatory supervision to improve audit quality and auditor independence. Finally, the results on the organizational form of CPA firms contribute to the literature by empirically demonstrating the link between auditor independence and the organizational form of CPA firms. This finding is also useful for regulators and the accounting profession as they attempt to evaluate the optimal balance in implementing a limited liability regime without diminishing audit quality and auditor independence. (Abstract shortened by UMI.)...