Restoring Trust Among Investors after Shredded CPA Reputation: Evidence from China

50 Pages Posted: 13 Jan 2012

See all articles by Heibatollah Sami

Heibatollah Sami

Lehigh University

Jeong-Bon Kim

City University of Hong Kong

Haiyan Zhou

University of Texas - Pan American

Junxiong Fang

Fudan University - School of Management

Date Written: January 12, 2012

Abstract

Our study examines whether CPA firms take measures to improve their audit quality and restore trust among investors when their reputations are in danger subsequent to disciplinary actions by the government regulatory agencies in China. Compared with a control group of the CPA firms without a reputation crisis, we find that the CPA firms with shredded reputation have lower audit quality, experience more CPA turnover, and earn lower audit fees prior to the publicized accounting scandals and relevant disciplinary actions. We also find that, subsequent to the disciplinary actions, these CPA firms significantly increase their audit quality when they operate under strong legal environments and when affiliated with Big 4, have no difference in audit quality from the control group, and are less likely to be dismissed and more likely to charge higher audit fees after taking remedial action. These results should be of interest to the accounting profession in general and those in emerging markets in particular.

Keywords: auditor reputation, shredded reputation, audit quality, discretionary accrual, accrual quality, capital markets

JEL Classification: M41

Suggested Citation

Sami, Heibatollah and Kim, Jeong-Bon and Zhou, Haiyan and Fang, Junxiong, Restoring Trust Among Investors after Shredded CPA Reputation: Evidence from China (January 12, 2012). CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1983744 or http://dx.doi.org/10.2139/ssrn.1983744

Heibatollah Sami (Contact Author)

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Haiyan Zhou

University of Texas - Pan American ( email )

1201 West University Drive
Edinburg, TX 78539
United States
956-381-3334 (Phone)
956-381-2407 (Fax)

Junxiong Fang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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