The Impact of Improved Auditor Independence on Audit Market Concentration in China

56 Pages Posted: 30 Oct 1999

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

T.J. Wong

University of Sothern California

Shuhua Li

China Securities Regulatory Commission

Date Written: September 1999

Abstract

In an effort to increase the credibility of financial information in its emerging capital markets, China recently adopted rigorous new auditing standards designed to increase auditor independence. Consistent with increased auditor independence, we find that the frequency of modified opinions increases nine-fold subsequent to the adoption of the new standards. However, the increase in modified reports is immediately followed by a large decline in audit market share among the largest auditors -- those with the greatest propensity to issue modified reports. We conjecture that this "flight from audit quality" results from the absence of market-based incentives for Chinese managers to demand independent auditors. Our findings suggest that government regulation alone is not sufficient to create financial markets that foster auditor independence.

JEL Classification: M49, L11, P31, G38

Suggested Citation

DeFond, Mark and Wong, T.J. and Li, Shuhua, The Impact of Improved Auditor Independence on Audit Market Concentration in China (September 1999). Available at SSRN: https://ssrn.com/abstract=184068 or http://dx.doi.org/10.2139/ssrn.184068

Mark DeFond

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

T.J. Wong (Contact Author)

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Shuhua Li

China Securities Regulatory Commission ( email )

Accounting
Office of The Chief Accountant 16 Jin Yang Plaza Xi Cheng District
Beijing 100032
China

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