The Impact Of CPA’s Legal Liability On Audit Quality

Since the1980s, China’s CPA system has changed in30years, accordingly, the systemof CPA’s legal liability has been developed. As an important guarantee of the marketeconomy, law has played increasingly prominent role in the capital markets. As the"economic police" of the capital markets, CPA’s behavior is also subjected by legalconstraints. Domestic and foreign scholars analysised the impact of legal liability for thebehavior of the CPA and audit quality through a series of studies. The purpose of thesestudies is to explore the arrangement of scientific and reasonable liability, to enable themto improve audit quality.This paper uses the judicial interpretation which issued by the Supreme People’sCourt on June11,2007as object of study, and investigates the impact of the last judicialinterpretation on audit quality by theoretical explanations combined with empiricalresearch. Empirical research includes two audit quality metrics: earnings quality and auditoption. The research confirms that the Certified Public Accountants have a certain abilityto identify earnings quality. But, the judicial interpretation which issued in2007did notsignificantly improve the audit quality. The research also provides a number of reasonableproposals to maintain China’s capital market order by laws, law enforcement and marketsurveillance mechanisms.