Do Government Initiatives and Reasons for Auditor-Client Realignment Influence Audit Fees and Audit Quality? Evidence from China

Nen-Chen Hwang, Wu-Po Liu

Research output: Contribution to journalArticle

Abstract

This study investigates whether the promotion of the initiative to expand and strengthen accounting firm practices by Chinese government since May 2007, and the decisions for auditor-client realignments will affect audit fees and audit quality. Analyzing data obtained from Chinese publicly listed companies from 2002 to 2014, the study first documents that the government initiative and state ownership are significantly influential in managerial decisions as to whether to reveal the reasons for realigning with auditors. We further classify our observations according to the realignment reasons disclosed and find that companies citing client-related drivers for realignments enjoy significant reductions in audit fees. In contrast, companies citing CPA firm-related reasons to switch auditors experience significant deterioration in audit quality after the government initiative to expand and strengthen accounting firm practices was promulgated in May 2007. Based on our experimental results, we draw policy implications and provide related suggestions to regulatory agencies, professional organizations, and accounting firms.
Original languageEnglish
Pages (from-to)211-256
JournalNTU Management Review
Volume30
Issue number2
DOIs
Publication statusPublished - 2020 Aug

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