Auditor Incentive and Audit Size: Evidence from Chinese Audit Market
28 Pages Posted: 12 Jan 2008
Date Written: January 11, 2008
Prior research has documented that Big 5 auditors provide higher quality audits in the U.S. due to reputation protection and litigation risk considerations. In this study, we examine whether Big 5 auditors provide significant higher quality audit than non-Big 5 in China, a far less litigious environment, during the period of 1999-2002. The Year 2000 witnesses a big surge of consolidations among Chinese accounting firms. We also use the dataset to explore the possible impacts on audit quality of Chinese accounting firms after these consolidations. We find that accrual quality of firms with non-Big 5 auditors is not significantly lower than clients of Big 5. We also find that accrual quality of firms with Chinese accounting firms improved after the consolidations. Our findings suggest that Big 5 audit does not contribute to the accrual quality differences in China, implying legal regime and litigation risk is more likely to drive auditor incentive. Also, the results provides new evidence to test DeAnglo (1981).
Keywords: accrual quality, Big 5 versus non-Big 5 audits, auditor incentive
JEL Classification: M41, M49
Suggested Citation: Suggested Citation