Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis

Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis

This study examines how the legal and regulatory changes in China affect the relationship between client economic importance and audit quality. At the individual auditor level, we find that the propensity to issue modified audit opinions (MAOs) is negatively correlated with client importance from 19...

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Bibliographic Details
Published in:The Accounting review 2010-01, Vol.85 (1), p.127-158
Main Authors: Chen, Shimin, Sun, Sunny Y. J., Wu, Donghui
Format: Article
Language:eng
Subjects:
Accounting methods
Auditing
Auditors opinions
Audits
Business accounting
Business audits
China
Client relationships
Commercial regulation
Correlation analysis
Economic regulation
Fees
Financial accounting
Financial audits
Financial reporting
Investors
Litigation
Management audits
Quality
Quality standards
Regression coefficients
Regulation
Studies
Variable coefficients
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Summary:This study examines how the legal and regulatory changes in China affect the relationship between client economic importance and audit quality. At the individual auditor level, we find that the propensity to issue modified audit opinions (MAOs) is negatively correlated with client importance from 1995 to 2000. However, from 2001 to 2004, when the institutional environment became more investor-friendly, the propensity to issue MAOs is positively associated with client importance. These findings are corroborated by an analysis of regulatory sanctions. Although client importance measured at the office level is also negatively related to the propensity for MAOs from 1995 to 2000 without controlling for the auditor-level client importance, this result is sensitive to model specification and sample composition. Our results suggest that (1) institutional improvements prompt auditors to prioritize the costs of compromising quality over the economic benefits gained from important clients; and (2) the impact of client importance on audit decisions appears to be different at the individual auditor and office levels.
ISSN:0001-4826
1558-7967