Do Regulations Limiting Management Influence Over Auditors Improve Audit Quality? Evidence from China

28 Pages Posted: 13 Dec 2012 Last revised: 3 Apr 2013

See all articles by Wuchun Chi

Wuchun Chi

National Chengchi University (NCCU) - Department of Accounting

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Xiaohai Long

Independent

Kun Wang

Tsinghua University

Date Written: December 1, 2012

Abstract

We use data from China to examine whether regulations that limit management influence over auditors improve audit quality. China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued two rules in 2004 aimed at improving audit quality for state-owned enterprises ultimately controlled by the central government (CSOEs). These rules limit management influence over auditors by mandating that SASAC assign auditors for CSOEs and by requiring management to retain auditors for at least two years and at most five years. Since these rules apply only to CSOEs, we use a difference-in-difference design to study the impact of these regulations on audit quality. We find that audit quality for CSOEs relative to other companies improves after the enactment of these rules. Our results are robust to a battery of sensitivity analyses. Our findings suggest that limiting management influence over auditors helps improve audit quality.

Keywords: audit quality, auditor independence, China, regulation, state-owned enterprise

JEL Classification: G38, M41, M42, M48

Suggested Citation

Chi, Wuchun and Lisic, Ling Lei and Long, Xiaohai and Wang, Kun, Do Regulations Limiting Management Influence Over Auditors Improve Audit Quality? Evidence from China (December 1, 2012). Journal of Accounting and Public Policy, Vol. 32, Issue 2, pp. 176–187, 2013 . Available at SSRN: https://ssrn.com/abstract=2188631

Wuchun Chi (Contact Author)

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan 116, Taipei
Taiwan
886-2-29393091-81031 (Phone)
886-2-29387113 (Fax)

HOME PAGE: http://www3.nccu.edu.tw/~wchi/

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

Xiaohai Long

Independent ( email )

Kun Wang

Tsinghua University ( email )

Beijing, 100084
China

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