Audit Term, Client Importance And Accounting Conservatism

Chinese audit work has made great development in recent years. It plays important roles inimproving conservatism of listed companies’ financial report and preventing accounting fraud.With the attraction of economic interest, accounting firm may act in concert with listedcompanies to take non-conservative accounting policy and manipulate earnings, that will invadeinvestors’ interest. From the perspective of auditing, audit term and client importance are two ofthe external factors that can influence accounting conservatism very much. Therefore, empiricalstudies of this paper have important theoretical and practical significance.We improve Basu(1997) reverse regression model and Ball and Shivakumar(2005) accrueditems and cash flow model, use panel data and pool data of all eligible A-share listed companiesbetween2006and2010. This paper makes empirical studies on the impact of accountingconservatism from audit term and client importance, and makes robustness tests on every modelsto assure the accuracy of conclusions. We draw three main conclusions. First, the longer auditterm is, the low accounting conservatism is. Second, the high client importance is, the lowaccounting conservatism is.Based empirical conclusions, we draw two policy proposals. First, regulation departmentshould make close restraint on audit term of accounting firm and insist to implement AccountingFirm Compulsory Rotation System. Second, regulation department should make some actions topenalize illegal activities that accounting firm matches up financial fraud of listed companies.