Does Mandatory Audit Firm Rotation Improve Audit Quality: Evidence from China State-Owned Enterprises

• Main Authors: Yalian Chen, 陳亞蓮
• Other Authors: Chan-Jane Lin
• Format: Others
• Language: en_US
• Published: 2017
• Online Access: http://ndltd.ncl.edu.tw/handle/xauhge

碩士 === 國立臺灣大學 === 會計學研究所 === 105 === Having witnessed a series of financial fraud cases, China started to introduce mandatory auditor rotation rules. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) introduced a series of rules in 2004-2006 to assign auditors to state-owned enterprises controlled by central government (CSOEs) and require CSOEs to rotate audit firm every 5 years. Some local regulatory authorities also issued related rules for state-owned enterprises controlled by local governments (LSOEs). This study uses abnormal accruals as a proxy for audit quality and examines the impact of mandatory audit firm rotation on audit quality, following Chi et al. (2013). In addition, this paper intends to examine the relationship between frequency of CSOEs’ mandatory audit firm rotation and audit quality during the rotation period. This study first uses a sample of 6719 state-owned enterprises firm-year observations from China stock market over the period of 2002-2015 to investigate the impact of mandatory audit firm rotation on CSOEs’ audit quality. Then it uses 1526 firm-year mandatory audit firm rotation data of CSOEs from 2006-2015 to examine the relationship between frequency of CSOEs’ mandatory audit firm rotation and audit quality. This study finds that both CSOEs and LSOEs improve their audit quality after the enactment of SASAC rules, but there is no difference in audit quality between CSOEs and LSOEs during post-rotation period. The results also indicate that CSOEs rotating audit firm more often have better audit quality in constraining upward earnings management.