Auditing Quality in China.
[Dissertation (University of Nottingham only)]
In the research area of Chinese auditing market, few studies have been conducted on the effects that auditor-related characteristics have on auditing quality. Thus, the paper is to examine the influences auditor-related attributes have on auditing quality, including size of the auditing firm, its income, and whether it is Big 4 or not. In addition to that, research topic on relationship between relationship between market concentration level and auditing quality is also an attractive one among the researchers. However, many studies on this subject is usually performed on a short-run periods and many suggest with a dominative market structure. Thus this paper wants to broaden the time period of data to have a larger sample base and thus to test the relationship between market concentration and auditing quality to see whether the government should promote dominative market structure or not. Therefore, this paper mainly investigates two subjects in the Chinese auditing market: 1) auditor-related attributes’ impact on auditing quality; 2) market concentration level and its impact on auditing quality.
In auditor-related attributes’ impact on auditing quality study, Total Accruals, which is the sum of the changes in current assets, in cash and cash equivalents, in current liabilities, in the current portion of debt and plus the amount of depreciation and amortization, is adopted as the proxy of the auditing quality of a listed firm as a firm will have low earning quality when holding high accruals. The subsequent multiple regression model demonstrates that auditor-related attributes, such as auditor’s income, its size, and whether it is BIG 4 or not, are not determinants of earning quality and auditing quality in China’s auditing market.
Then in market concentration level and its impact on auditing quality part, the market share of the top four largest and eight auditing firms in the four areas of No. of Customers, Customers’ Assets, Auditor’s Income and Customers’ Income is used to measure the market concentration level, and it is found that overall the Chinese auditing market is characterized by oligopolistic competition. And the BIG 4 are found to outperform domestic CPA firms, especially in premium client segment. Then using Qualified Opinion, Adverse Opinion and Disclaimer of Opinion report as the proxy of good auditing work of an auditing firm, a reserve relationship is discovered by conducting regression analysis between concentration ratio and proxy of auditing quality. This indicates the need to reduce market concentration level in the Chinese auditing market so as to increase auditor’s auditing quality.
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