Does Allowing Cross-Listed Firms More Freedom in Auditor Choice Reduce Audit Quality?

Abstract

This study investigates the consequences of a 2010 regulatory shift permitting Hong Kong listed cross-listed firms greater flexibility in selecting auditors. Previously, Hong Kong-listed mainland Chinese companies (H share firms) were mandated to use Hong Kong-based auditors only for their local audits. The new regulation, however, allows these firms to choose between Hong Kong and mainland China auditors. Our findings reveal that post-regulation, H share firms benefitted from lowered audit fees and a decreased incidence of modified audit opinions. Notably, the decline in modified audit opinions seems attributable to an adjustment of prior excessive conservatism by Hong Kong auditors, rather than a deterioration in audit quality. This research presents the first empirical analysis of the impact of two divergent regulatory policies on auditor choice on the audit quality of cross-listed firms.

Keywords: audit fees; audit opinions; auditor choice regulation; cross-listed firms; audit market competition

JEL Classification: M41; M49; D43