Auditor Incentive and Audit Size: Evidence from Chinese Audit Market

28 Pages Posted: 12 Jan 2008

See all articles by Jun Zhan

Jun Zhan

Concordia University, Quebec; University of Massachusetts Dartmouth - Charlton College of Business

Michel Magnan

Concordia University - Department of Accountancy

Date Written: January 11, 2008

Abstract

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

Zhan, Jun and Magnan, Michel, Auditor Incentive and Audit Size: Evidence from Chinese Audit Market (January 11, 2008). (CAAA) 2008 Annual Conference Paper. Available at SSRN: https://ssrn.com/abstract=1082945 or http://dx.doi.org/10.2139/ssrn.1082945

Jun Zhan (Contact Author)

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

University of Massachusetts Dartmouth - Charlton College of Business ( email )

285 Old Westport Road
North Dartmouth, MA 02747
United States

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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