搜索
AggregateQuasiRentsandAuditorIndependence:EvidencefromAuditFirmMergersinChina壹贰叁肆伍Introduction陆捌柒HypothesesdevelopmentResearchmethodandsampledataAnalysisofauditors’reportingdecisionsFurtheranalysesMagnitudeofmergerimpactandpost-mergerauditqualityimprovementSummaryandconclusioninstitutionalbackground1.IntroductionInaninfluentialstudy,DeAngelo(1981)showsthatauditors’commitmenttoindependenceispositivelyrelatedtoauditfirmsize.Shearguesthatlargeauditfirmshavemoreaggregatequasirents,whicharedefinedasauditfeesinexcessofauditcosts,toserveascollateralagainstopportunisticbehavioronthepartofauditors.Becausetheauditorsinlargeauditfirmshavemoretoloseiftheyfailtoreportbreachesinclients’accountingreports,theyaremoremotivatedtoprovidehigherqualityauditservices.Consistentwiththisargument,researchershavefoundthatauditfirmsizeispositivelycorrelatedwithauditquality.However,empiricalevidenceontherelationshipbetweenauditfirmsizeandauditorindependenceisconfoundedbyanumberoffactors•First,asWattsandZimmerman(1986)pointout,auditqualityisajointproductofanauditor’scompetenceandindependence.Largeauditfirmsarebetterabletorecruitgraduatesfromleadinguniversities,hirereputablespecialistsfromthelabormarket,andofferspecializedtrainingtotheirstaff.Peerreviewsarealsomoreprevalentandrigorousinthesefirms.•Thesecondconfoundingfactoristhebrand-nameeffect.Thebrandnameinvestmentmodel(KleinandLeffler1981)predictsthatauditorsaremotivatedtomaintainauditqualitytoprotecttheirbrandnameonceithasbeenestablished.•Finally,thematchbetweenclientsandauditorsisnotrandom.Onthedemandside,clientsselecttheauditfirmsthatbestmeettheirneedtolowercosts(JohnsonandLys1990).Onthesupplyside,auditfirmsselecttheirclientsstrategicallytoreduceauditrisk(Shu2000;JohnstoneandBedard2004).UsingdataonauditfirmmergersinChina,weinvestigatetheempiricalrelationshipbetweenauditfirms’aggregatequasirentsatstakeandauditorindependenceinasettingthatallowsustomitigatetheaforementionedproblems.Aswillbediscussedinmoredetail,priorresearchonauditorexpertisesuggeststhatmergersarenotlikelytoaffectauditorcompetenceimmediately.However,theydohaveanimmediateandsignificantimpactonauditfirmsizeandauditors’aggregatequasirents.Therefore,thechangesinauditqualitythatoccurimmediatelyaftermergerstakeplacecanbeattributedmainlytochangesinauditors’independenceratherthancompetence.Moreover,weinvestigatethedifferencesinindependencebetweenthepre-mergerandimmediatepost-mergerperiodsoftheauditorsinthesameauditfirms,ratherthanthecross-sectionaldifferencebetweenBigNandnon–BigNfirms.UnlikeintheUnitedStatesorotherdevelopedcountriesinwhichthevastmajorityofpubliccompaniesareauditedbyBigNfirms,China’sauditmarketwasdominatedbysmalldomesticauditfirmsduringoursampleperiod.theeconomicandregulatorychangesinChina’sauditmarketinducedalargenumberofauditfirmmergersinashortperiodoftime,thusenablingustoinvestigatetheimpactofmergersonauditqualityinasimilarenvironmentforanimportanteconomy.China’sinstitutionalsettingalsoallowsustosplitoursampleintotwomergergroups.Inthemultilicensemergers,mergersoccurbetweentwo(ormore)accountingfirmsthatarelicensedtoauditlistedcompanies;inthesingle-licensemergers,anaccountingfirmwithsuchalicensemergeswithnonlicensedfirms.Becausepubliclytradedcompaniesmakeagreaterpublicimpactthandoprivatefirms,theauditsofthesecompaniesaresubjecttogreaterpublicscrutiny.Anyopportunisticbehaviorthatoccurswhenauditinglistedclienteleisthusmorelikelytobedetected,andtheconsequences,suchasthesuspensionorrevocationofthelicensetopracticeandtheresultantlossofclients,willbemorecostly.Therefore,quasirentsfromlistedclientelearemoreeffectiveincurbingauditormalfeasance.Asnonlicensedfirmshavenolistedclients,wepredictthatmultilicensemergerswillleadtoalargerincreaseinthequasirentsatstakethanwillsingle-licensemergersandthusmakeanyopportunisticbehavioronthepartofauditorsmorecostly.Weproxyauditorindependencebyauditopinionsandexaminethechangeinauditors’propensitytoissuemodifiedauditopinions(MAOs)aroundthetimeoftheauditfirmmergers.WefindthatauditorsissuemoreMAOsaftermultilicensemergers.Insharpcontrast,thereisnosignificantchangeinMAOsaftersingle-licensemergers.Finally,wealsofindthattheincreaseinMAOsispositivelycorrelatedwiththechangeinthesizeoflistedclientelethatresultsfrommultilicensemergers.Takentogether,theevidenceindicatesthatanincreaseinauditfirmsizedoesnotnecessarilyleadtoanimprovementinauditorindependence.Whatmattersisthesizeofthepublicclientele,wherethequasirentsaremorelikelytoserveascollateralagainstauditormalfeasance.2.InstitutionalbackgroundTheeconomicreformsthathavetakenplaceinChinasince1979havebroughtaboutstructuralchangesinthenationaleconomy.Theentryofforeigninvestmententerprisesandtherestructuringofstate-ownedenterprises(SOEs)asjointstockcompanieshavecreateddemandforindependentaudits.In1980,thefirstChinesecertifiedpublicaccountant(CPA)firmwasestablishedinShanghai,andthousandsofnewfirmsweresubsequentlyestablishednationwide(Tang2000).Intheearly1990s,theShanghaiandShenzhenstockexchangesopened.Toperformauditservicesforthecompanieslistedonth