Does The Annual Report Inquiry Letter Impact The Accounting Firm Change?

Since the introduction of the through train system of information disclosure by Shanghai and Shenzhen Stock Exchanges,the supervision institution of securities market has been transformed to focus on the post audit of the listed companies’ periodic reports.The annual report inquiry letter has become one of the important methods for the stock exchange to conduct non-punitive supervision on the listed companies.Since receiving the inquiry letter of the stock exchange will send negative information to the market to some extent,it will increase the potential audit input cost,reputation damage cost and penalty risk cost of the accounting firms,so the total cost of the audit client may exceed the audit fee.Based on rational person’s decision,the accounting firms tend to terminate contracts with high-risk clients who receive annual report inquiry letters to optimize client structure.The listed companies also attach great importance to inquiry letters,hoping to change the accounting firm to obtain higher quality audit services and send positive information by solving problems actively to the market,or complete the purchase of audit opinions.Since the accounting firm change is a contract change,the relevant characteristics of contract subjects may affect the relationship between the annual report inquiry letter and the accounting firm change.The existing literature mainly introduces financial risk and auditing industry expertise to conduct further research on annual report inquiry letter and the accounting firm change.The main contribution of this paper is to introduce variables in terms of the accounting firm characteristics and the listed company characteristics.At the accounting firm level,there are two main characteristics that are most relevant to the audit business relationship.One is the professional competence and reputation;The other is the importance of clients.So this paper chooses two variables——"Big8" and the importance of clients;At the listed companies level,there are many characteristics related to audit business relationship,while the background characteristics are more important,because it will involve all aspects of the listed companies.So this paper selects two variables——equity nature and political connection.This paper chooses A-share listed companies from 2015 to 2019 as research samples,and uses logistic regression model for the research.The empirical results show that the listed companies that receive the annual report inquiry letter have a higher probability of accounting firm change in the next year.At the same time,the results show that the above relationship is significant when the accounting firm belongs to the "Big8",the audit client is of high importance,the listed company is not a state-owned company and the listed company has no political connection.However,when the accounting firm is not the "Big8",the importance of audit clients is low,the listed company is a state-owned company and the listed company has political connection,the above relationship is not significant.