Does Access to Developed Audit Markets Improve Home Audit Quality? Evidence from China
Accounting and Business Research, Forthcoming
60 Pages Posted: 8 Jul 2021
Date Written: June 29, 2021
Abstract
In December 2010, Hong Kong regulators allowed 12 mainland Chinese registered audit firms to audit companies incorporated in mainland China and listed in Hong Kong (H-shares). In this study, we examine whether access to the Hong Kong audit market improves the quality of audits conducted by these Chinese audit firms for clients listed in the mainland markets (A-shares). Using data from 2008 to 2016, we find that mainland auditors with H-share clients provide higher quality audits, as measured by more modified audit opinions, higher audit fees and less earnings management, than auditors without H-share clients. This effect is more pronounced when the auditors are non-Big 4 firms and the clients are listed only in mainland China. Further analysis shows that A-share investors react positively to the initial announcement that mainland auditors are permitted to conduct H-share audits. Overall, our findings suggest that H-share audits have a positive spillover effect on the quality of A-share audits.
Keywords: audit quality, Big 4, non-Big 4, China, H-share, spillover
JEL Classification: M42, M48
Suggested Citation: Suggested Citation