Three essays on audit market development: evidence from China’s recent reforms

Al Natour, Abdul Rahman Ahmad Abdullah (2019) Three essays on audit market development: evidence from China’s recent reforms. PhD thesis, The University of Nottingham.

[img] PDF (Thesis - as examined) - Repository staff only - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (3MB)


This thesis examines the impact of China’s market developments on the accounting industry over the period 2003 to 2014. In this period China initiated the Split-share Structure Reform (SSSR) to privatise Local State-owned Enterprises (LSOEs). Moreover, China announced “Document 56” with the aim of developing its domestic accounting industry. The thesis consists of an introductory chapter, an institutional background chapter, three empirical essays, and a concluding chapter.

The first essay investigates audit firm choice by listed firms in China over the period 2003 to 2014. The chapter examines the development of a domestic Chinese accounting industry by promoting its domestic accounting firms over the international Big 4 accounting firms. Studying a Chinese sample from 2003 to 2014, I find that Chinese firms have tended to hire higher quality audit firms since the SSSR and Document 56. Nonetheless, this tendency is mainly driven by the hiring of domestic Big 6 audit firms rather than the international Big 4. The study also highlights how market development increases high quality auditor choice, and how it moderates state influence over the firm’s auditor choice. By decomposing high quality accounting firms into the international Big 4 and Chinese domestic Big 6, this paper extends the literature on political economy and auditor choice. Moreover, it explains how China has developed its domestic accounting industry through the SSSR and Document 56.

The second essay investigates auditor independence in China throughout the period from 2003 to 2014. It uses the propensity to issue a modified auditor opinion (MAO) as a surrogate for auditor independence. Using a sample of 1,826 Chinese listed firms, I report a negative impact of state influence on auditor independence. The results also show a decline in the propensity to issue a modified auditor opinion in the period after the SSSR. Nevertheless, following the announcement of Document 56, there is an overall improvement in auditor independence. A detailed analysis shows that this tendency to issue modified auditor opinions is mainly through attaching an emphasis of matter paragraph to an unqualified audit opinion instead of issuing an audit qualification. Even though I do not find a significant impact of high quality auditor choice on improved auditor independence, it moderates the LSOEs’ influence on the propensity to issue an MAO. The study provides empirical evidence for regulators to assess how the SSSR and Document 56 improve auditor independence in the country. It also highlights the role of the auditor choice in three groups in correspondence to the auditor choice essay findings.

The third essay examines audit quality in China over the period 2003 to 2014. It uses audit fees as a surrogate for higher audit quality. From a sample of 1,826 Chinese listed firms, the main results show that government influence impairs audit quality as I find that LSOEs are charged lower audit fees compared with NSOEs. Consistent with the previous literature, I find that big audit firms, both domestic Big 6 and international Big 4, charge higher audit fees. After the completion of the SSSR, I find a decline in audit quality, followed by an overall improvement in audit quality in the period after the announcement of Document 56. Hence this study provides some basis for policymakers to evaluate how market deregulation (i.e., the SSSR) affects audit quality.

Overall, the thesis casts light on China’s recent structural reforms and how they, in turn, improve the development of the accounting industry in the country. It summarises the differences between China’s institutional setting and the more western capitalist economies such as the UK and the US. Hence, it incorporates China’s unique characteristics (i.e., concentrated ownership, diffused audit market and the market development differences across different regions) in studying the determinants of auditor choice, auditor independence and audit quality (as proxied for by the pricing of audit services). By doing so, this study provides an empirical investigation into the developments of China’s audit market in the light of its recent reforms. The findings and implications of this study can also be incorporated into the transfer of the Chinese experience to other transitional economies with similar structural designs.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Kim, Ja R.
Stark, Andrew
Keywords: Audit Quality, Ownership Structure, Auditor Choice, Accounting industry, China
Subjects: H Social sciences > HF Commerce
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 56502
Depositing User: Al Natour, Abdul
Date Deposited: 25 Jul 2019 10:39
Last Modified: 07 May 2020 11:30

Actions (Archive Staff Only)

Edit View Edit View