Title
|
A Continuous Relation between Audit
Firm Size and Audit Opinions : Evidence from China
|
Author
|
Chanto Li, Frank M. Song and Sonia
M.L. Wong
|
Year
|
2008
|
Introduction
This study examines
the relation between audit firm size and audit opinion in China’s emerging
audit market for publicly listed firms from 2001 to 2003. Our study has two
motivations. First, our study documents developments in China’s rapidly
changing audit market since 2000. DeFond et al.’s (2000) substantial study of
audit quality in China between 1993 and 1996 finds that large audit firms in
China issued more modified audit opinions, leading them to conclude that large
audit firms are more independent than smaller firms. However, they also find
that large audit firms’ market share decreased in 1996 when China’s regulators
imposed policies to increase the level of audit independence. This implies a
lack of demand for high-quality audits during that period. The audit size
quality relation would have been negative rather than positive if this trend
had persisted. Nevertheless, new policies mandated by Chinese government in the
late 1990s were likely to promote the demand for and supply of higher-quality
audits. We investigate audit firm size and audit quality in the period
following China’s new policies to determine whether the demand and supply of
higher-quality audits has changed.
SAMPLE AND RESEARCH
DESIGN
Sample
We exclude 24 firms
that are only listed on the B-share market and also firms from the finance
industry (52 firm-year observations) as they follow a different accounting
reporting system from firms in other industries.10 We also drop observations of
firms in their IPO year. For each listed firm, we obtain data on the name of
the audit firm, the corresponding audit fee and the auditor’s opinion from its
annual report. Out of the 1,136 (1,200, 1,263) firms listed at the end of 2001
(2002, 2003), we have complete data for 1,016 (1,158, 1,222) listed firms.
EMPIRICAL RESULTS
Descriptive
statistics
Table 5 reports the
correlations between the variables. A negative, significant correlation exists
between Client Size and Opinion, suggesting that small listed firms tend to
receive modified opinions. We also find a significantly positive correlation
between Opinion and earnings management (EM) as well as Opinion and ST Loss
dummy, indicating that firms with increased earnings management and/or higher
default risks are associated with more modified audit opinions. The
correlations between the three audit firm size measures are quite high, with
correlations ranging from 0.81 to 0.93. This is not surprising as audit firm
size is being measured from different dimensions. The correlation between
Assets Audited and Client Size is positive and significant, indicating that
large listed firms are more likely to be audited by large audit firms.
Furthermore, Assets Audited is negatively related to ST and Loss, suggesting
that large audit firms tend to select listed firms that have lower default
risks as their clients.
CONCLUSIONS
Using panel data of
audit firms and listed firms in China from2001 to 2003, Our study provides a
useful addition to the existing literature on audit firm size effects because
of China’s unique market structure. Unlike most developed audit markets where
the market has been dominated by a few large audit firms such as the Big 8/6/4,
a far greater number of smaller audit firms exist in China’s audit market. Our
evidence suggests that positive audit firm size effects are not specific to
audit markets that are dominated by a few large audit firms. Among a sample of
Tidak ada komentar:
Posting Komentar