Auditor Selection: Synergic Effect And Scope Economy Hypothesis

Auditor selection has been a key issue for accounting academics, practitioners, and regulators. But till now, it is still a confusing question why Chinese A-share listed companies select Big 4 to audit their A-share financial statements. Many researchers concluded that there are no market demands for high quality audits, so western classical auditor selection theories can't explain Chinese phenomena sufficiently.My dissertation begins with the question why Chinese listed firms select Big 4 to audit their A-share financial statements. After analyzing characters of A-share listed firms who select Big 4 as their auditors of A-share financial statements, we find that more than half of them are cross-listed firms. Then our question turns into why cross-listed firms are much more inclined to select Big 4 to audit their A-share financial statements than purely domestic-listed firms. Combined with the special market environments and duplicate audit arrangements faced by cross-listed firms, we raise the synergic effect and scope economy hypothesis.In our research, we also find that in addition to the influence on the auditor selection to Big 4, the synergic effect and scope economy also has an effect on the auditor selection to non-Big 4. So we extend our research into the discussion of influence of the synergic audit ability and cross market audit ability on the auditor selection and the market share of CPAs. In the end of this dissertation, we also investigate the effect of the model of the auditor selection of cross-listed firms on the audit pricing.From the dissertation, we are able to draw some conclusions:1. In comparison to the A-share market, the cross-listed firms are more inclined to select Big 4 in overseas market, and relative to B-share market, the cross-listed firms prefer selecting Big 4 in H-share market.2. For the reason of synergic effect and scope economy, if a cross-listed firm select Big 4 as its overseas auditor, it will be inclined to select Big 4 to audit its A-share financial statements.3. Relative to purely domestic-listed firms, cross-listed firms are more inclined to select Big 4 to audit its A-share financial statements.4. In comparison to firms only listing in A-share market, cross-listed firms are more inclined to select auditors which have the synergic audit ability or cross market audit ability, and relative to firms cross-listing into B-share market, those firms cross-listing into Hong Kong market will more likely to do so.5. If domestic auditors have the synergic audit ability or cross market audit ability, they can occupy more shares in the cross-listed firms audit market, and the more early the domestic auditors get the ability, the more cross-listed firms audit market share they can occupy.6. When the auditors audit the financial statements for overseas markets, the audit fees charged by Big 4 is significantly higher than that charged by non-Big 4. Otherwise, if the auditors audit the A-share financial statements, the fees charged by Big 4 is not significantly different from that charged by other auditors.7. The synergic effect and scope economy also have influence on the audit fees. If auditors can realize the synergic effect or scope economy in duplicate audits, which can save the time and energy of the management, cross-listed firms will pay more audit fees.The contributions of the dissertation include:1. In order to explain the auditor selection in China where the demand for high quality audit is not given, we raise the synergic effect and scope economy hypothesis. This hypothesis enriches the theoretical framework for auditor selection. Combined with other researchers'conclusions, we believe, the synergic effect and scope economy hypothesis explains why Chinese listed firms actively choose Big 4 to audit their A-share financial statements.2. The dissertation provides a more detailed explanation of the motivation why Chinese firms choose Big 4 from the perspective of market segment, and it also provides the evidence that there is still no demand for high quality audit in China stock market. So till now, we can't directly take the selection to Big 4 as the symbol of good corporate governance.3. The dissertation first systematically studies the auditor selection behavior of cross-listed firms in duplicate audit arrangements. Our conclusions show that listed firms will adjust their behavior according to the change of environments. It is consistent with enterprise evolutionism and economic Darwinism.4. The dissertation shows that cross-listed firms are a special group, whose corporate governance and behavior are always different from those of purely domestic-listed firms. So we should pay more attention to this special group in our future researches. 5. Till now, some researchers have found that audit fee charged by the auditors which come from the same group are higher than that charged by the auditors coming from the different groups, but they failed to provide a explanation. The dissertation first explains this phenomenon with the theory of synergic effect and scope economy.