The Competitive Strategy And Consequences Of The Setting Up New Audit Office

CPA audit is an important institutional arrangement of capital market,which plays an important role in ensuring the healthy and sustainable development of capital market.Quickly making domestic accounting firms "bigger and stronger" is an important strategy for the supervision of audit market in China.Under the guidance of this strategy,the regulatory authorities issued a series of policies to encourage accounting firms to expand their scale through mergers and reorganizations and the establishment of branches,thus rapidly enhancing the concentration of audit market in China.Establishing branch offices is one of the main ways for accounting firms to contract customers from different places.Branches can make full use of local social capital to expand customers,expand business scale,form economies of scale,and accelerate the development of accounting firms.However,the uneven audit quality is the main problem in the practice of branch offices.Because of the imperfect internal governance of the firm,the weak control of the branch offices,the phenomenon of seemingly divorced from each other,the slow progress in the unification of finance,personnel and quality control among the branch offices,the quality of the branch offices' practice is worrying,but the quality of their practice is still lacking of direct accuracy.Confirmed empirical evidence supports this.Competitive behavior and economic consequences in sub-regional auditing market are increasingly concerned by regulatory authorities and academia.Compared with the developed capital market,China's capital market is not yet developed,the relevant regulatory system can still be further improved,and the degree of investor protection is low;the capital market cannot effectively distinguish between audit responsibility and accounting responsibility,lack of civil accountability mechanism for audit failure,lack of channels and capabilities for investors to directly supervise auditors' behavior,and auditors' violations of laws and regulations.The cost is low.In view of the fact that intellectual capital and human capital are the most prominent characteristics of accounting firms,audit business cannot be separated from the professional knowledge of CPAs and the professional judgment of CPAs on specific issues.The risk awareness and responsibility awareness of CPAs directly affect the audit quality.Therefore,most accounting firms in China choose the organizational form of the special general partnership.The insufficient demand for high-quality audit in China's audit market and the limited role of audit mechanism in investor protection make the listed companies fail to transmit signals to the market through high-quality audit,and the firms cannot obtain significant premium by establishing and maintaining reputation.In this context,firms' headquarters and branches show great differences in choosing competitive strategies,and influence each other.The essence of competition strategy chosen by branch offices is the choice of audit quality,which reflects not only the judgment of audit demand in regional audit market,but also the strategic orientation of branch offices for their own long-term development.High-quality audit needs require firms to have a high reputation.By employing high-quality auditors to transmit signals to investors,the cost of signals is higher audit costs,which can be distinguished from other listed companies.Low-quality audit needs require firms to provide as many audit discounts as possible.Listed companies are forced to audit under the requirements of laws and regulations.Choose firms with lower audit fees from the perspective of cost control.Correspondingly,when choosing competitive strategies,firms will take full account of market demand,determine their own audit fees and audit quality,and make long-term profit maximization choices.Therefore,it is of great significance to study the selection of competitive strategies at thebranch level and to accurately examine the economic consequences of competitive strategies for improving the audit quality of China's capital market and perfecting the audit system.Firms acquire the social capital of their branches by setting up new branches in the local area,which enlarges the business scale and also causes agency conflicts between the branches.The incompleteness of the contract between the branch offices makes it possible for the branch offices to "rip off" the motive and use the reputation and brand of the branch offices to undertake business.However,due to the greater externality of the reputation and brand,the branch offices may have opportunistic behavior and obtain short-term profits by damaging the reputation of the branch offices.In the regional audit market,by setting up branch offices to participate in the competition of local audit market,the new branch offices intensify the market competition;the competition strategies of branch offices include price competition and non-price competition: under the price competition strategy,the audit fee discount implemented by branch offices competes for customers;under the non-price competition strategy,branch offices may gain reputation premiums of audit fee by improving audit quality.It may also undertake more business by catering to customer requirements and lowering the threshold for issuing standard audit opinions.However,the internal governance level of branch offices still needs to be improved,and branch offices do not have the motivation to establish and maintain the reputation of firms.Therefore,for their own survival and development,branch offices may sacrifice audit quality and contract more customers.This dissertation collects detailed data on the establishment of branch offices and audited by branch offices of listed companies from 2013 to 2017.Empirical models are used to test the market competition behavior of newly established branch offices under intense market competition pressure and its impact.The market competition strategies adopted by new branch offices and their consequences,including price competition strategies,non-price competition strategies and existing firms,are also examined.Response to the competition strategy of newly established firms.Empirical analysis shows that:Firstly,the competition in the local audit market is aggravated by the business competition of the new branch office.When firms set up branches in a certain area,the audit supply in this area increased,which intensified the competition among firms.The possibility of listed companies improving audit opinions by changing auditors increases,and listed companies are more likely to change to new branches for audit.In the face of competition from other firms,the more branches the firms set up in a certain place,the more likely they are to take on new customers.Secondly,the new branch office will reduce audit fees in order to contract customers,there is a low-cost solicitation behavior.Compared with the established branch offices,the new branch offices are more likely to adopt the strategy of reducing price competition under the pressure of market competition,and are more prone to low-price solicitation.At the same time,the existing firms will also reduce the price to maintain the existing customers,that is,the price competition behavior of the new branch has a certain spillover effect,which triggers vicious price competition behavior in the industry.Finally,in order to attract customers,the new branch lowered the threshold of issuing standard audit opinions,which inevitably led to the decline of audit quality.This dissertation finds that,compared with established branch offices,the audit opinions of the companies that issued non-standard opinions in the previous period have been significantly improved after they were changed to audit new branch offices.In other words,listed companies have successfully realized the purchase of audit opinions for new branch offices.At the same time,it is not found that existing firms reduce audit quality to maintain the behavior of existing customers.To sum up,under the pressure of market competition,because of the agency conflict between the new branch office and the whole firm,the new branch office of the firm tends to adopt more radical competition strategy,that is,to adopt low-quality and low-price competition strategy.Although it has successfully contracted new customers,it has triggered vicious price competition within the industrial system.The malignant and disorderly price competition in the new branch office will affect the credibility of the CPA industry and challenge the sustainability of the CPA industry.It runs counter to the original intention of supporting the development policy of the CPA industry and needs the attention of the social and industry regulatory authorities.The contributions of this dissertation are as follows: Firstly,from the perspective of audit market competition,it supplements the empirical evidence of the implementation effect of accounting industry development policy.This dissertation uses the audit data of listed companies from 2013 to 2017 to examine the economic consequences of competition in the audit market of new branches,and provides empirical evidence for investors,regulators and listed companies to make decisions.Secondly,it enriches the research at different levels.In the past,the research literature on firm competition mostly started from the perspective of the general office.This dissertation takes the newly established branch office as the research object,which is closer to audit practice and conforms to the reality of auditor decision-making scene.Using more abundant and accurate data,the conclusion is more robust.This dissertation not only enriches the research on audit fees and audit quality at the branch level,but also explores the economic consequences of the self-interest behavior of the branch under the conflict of agency of the general branch.