Auditor Groups and Audit Quality: Evidence from China

Abstract

Audit reports in China record the names of two signing auditors. Through co-signed audit reports, we observe auditor groups within large Chinese accounting firms. We find that these auditor groups are very stable over time. They act like autonomous units within accounting firms. They control clients, appoint signing auditors, and conduct audits. We conjecture that there is a post-merger integration problem in these large Chinese accounting firms and audit quality is not uniform across different sizes of auditor groups. Based on the auditing literature, we hypothesize that large auditor groups are more likely to issue qualified audit opinions, and hence provide higher quality audits. Our empirical results are consistent with our prediction. Our results show that accounting firms in China have become bigger but not stronger.

Keywords: auditor group; audit quality; audit opinion

JEL Classification: M42; M48