Effects Of The Transformation Of Accounting Firms' Organizational Form On Audit Quality

This paper tries to explore the principles of how the transformation of accounting firms'organizational form affects the audit quality, based on the natural experiment promoted by the Ministry of Finance, which shifts accounting firms' organizational form to "special general partnership". Enlightened by the empirical results listed above, this paper,using the law liability's changes caused by the transformation of accounting firms' organizational form as the breakthrough point, then takes into consideration of the auditors with different individual characteristics (risk preferences), the risk of clients' litigation (financial distress)and the nature of the audit clients' property to make further studies on the influence mechanism of the transformation of accounting firms' organizational form on audit quality.The paper comes to the conclusion in the end of the regularities of auditors' behaviors as the law liability have changed by the transformation of accounting firms' organizational form.Therefore, on the one hand, this paper tests the economic consequences of the transformation of accounting firms' organizational form. On the other,the conclusions may be a valuable reference for making further policies by regulatory authorities and provide theoretical guidance for accounting firms to solve new problems. The contributions of this paper possibly involve the following aspects.Firstly, different from past literatures, this paper uses a sample of Chinese listed companies, which are audited by the same accounting firms during the period before and after their transformation. The paper investigates empirically the overall impact of the transformation of accounting firms' organizational form on audit quality from three aspects:audit opinions, earnings management and accounting conservatism. The empirical results show that auditors are more likely to issue modified audit opinions after accounting firms'organizational form shifts to special general partnership, the earnings management degrees of their clients' become lower,and the accounting conservatism of their clients' is higher after the transformation. All of these prove that the transformation of the accounting firms'organizational form promoted by supervisory departments has improved the audit quality of the capital market.Secondly, basing on the above studies,this paper further analyses auditors' individual characteristics from the angles of the accounting conservatism influenced by the transformation of accounting firms' organizational form. Considering the changes in risk exposure caused by the transformation of accounting firms' organizational form, this paper tests changes in clients' audit quality which is audited by auditors with different individual characteristics. The results indicate that audit clients' accounting conservatism is significantly improved after the transformation of their accounting firm. However, the paper finds that it is significantly different on the extent of improvement of audit clients'accounting conservatism,which is audited by auditors with different individual characteristics. Specifically, compared with clients audited by non-partner auditors or auditors of low-levels of education,audit clients' accounting conservatism is improved more significantly when they are audited by partner auditors or highly educated auditors.Moreover, audit clients' accounting conservatism audited by auditors older or more experienced is improved relatively less than those who are younger or less professionally experienced. Further analysis finds that the cause of this result is the different risk preference of auditors with different individual characteristics. Therefore, auditors show a significant difference in their reporting behaviors as accounting firms' organizational form shifts to special general partnership and their liability exposure increases.Thirdly, basing on the studies of the overall impact of the transformation of accounting firms' organizational form on audit quality, this paper examines the effects of clients'heterogeneity on policy effect of the transformation of accounting firms' organizational form from the angle of auditors' reporting conservatism. On the one hand,this paper tests whether the nature of the audit clients' property influences the economic consequences of the transformation policy of accounting firms' organizational form. The results indicate that the transformation of accounting firms' organizational form improves auditors' reporting conservatism, but it mainly improves auditors' reporting conservatism in BIG10. Specifically,the nature of state-owned property rights weakens the positive effect of the transformation of accounting firms' organizational form on auditors' reporting conservatism. Compared with state-owned listed companies, non-state-owned listed companies have a higher probability to receive modified audit opinions and a larger extent to lower their audit reporting aggressiveness after the transformation. Besides, the higher the percentage of shares owned by the state is,the weaker the positive effect of the transformation of accounting firms'organizational form on auditors' reporting conservatism will be. The paper also finds that although auditors' reporting conservatism is improved in state-owned listed companies,it is still less than in non-state-owned listed companies after the transformation; while the audit fees increased more in state-owned listed companies. On the other hand, this paper further examines the different influence of the transformation of accounting firms' organizational form on auditors' reporting conservatism of audit clients of different potential litigation risk level. Compared with clients of lower risk exposure, or high quality in other words, the paper finds that clients of higher risk exposure have a higher probability to receive modified audit opinions and a larger extent to lower their audit reporting aggressiveness after the transformation. This declares that the effect of the transformation of accounting firms'organizational form on auditors' behaviors of clients of higher risk exposure is more significant,and the extent of auditors' reporting conservatism in clients of higher risk exposure is larger than the lower risk exposure ones. The conclusion means that clients'potential litigation risk level has a significant effect on the economic consequences of the transformation of accounting firms' organizational form, and the transformation of accounting firms' organizational form strengthens auditors' identification and control to their clients.Lastly, previous literatures, using a mixed sample composed of accounting firms of"transformational group" and "non-transformational group",examine the differences of the audit quality between them. Now that all of the accounting firms, organizational form have been turned to the "special general partnership",this paper may be different from past literatures and can use the panel data to test the changes of auditors' behaviors as well as the audit quality of the same clients, which are also audited by the same accounting firms during the period before and after the transformation. This panel data analysis can better solve self-selection bias. Moreover, unlike DID models, it does not require that the data of samples are independent identical distribution, thus it may provide a new idea for the similar topic in the subsequent studies.