| The dissertation is motivated by the vast disparity of audit fees among big auditors and their smaller counterparts. According to the annual report of C1CPA in2009, the charge paid by Bank of China to its auditor, Pricewaterhouse Cooper, of highly prestigious in global capital market, reached highest, amounting to two hundreds and seven millions. However, a great number of domestic accounting firms were merely offered less than one hundred thousand. This consequently raises public question:whether big auditors are representative of high-quality audit service and worth receiving premium paid by their clients?Prior literatures document that big auditors are more likely to object to management’s earning manipulations due to the argument of Quasi rent. Nevertheless, all of these empirical evidences were obtained under the institutional settings which differs distinctly from China, the transitional economy, featuring lower-level investor protection and poorly developed financial system.Therefore, my study is put effort into addressing three questions:First, Do big auditors provide high-quality service to their clients? Concerning this question, It has been proposed that big auditors have no intention to provide high-quality service owing to the absence of effective legal supervision over big auditors. To some extent, I am partly against this view based on the reason that substitution to formal institutional arrangements, the reputation mechanism, exists behind in China to support economic growth. Except legal supervision, I believe, these factors may also take effect on forcing big auditors to provide high-quality audit service despite the lack of robust investor protection. Moreover, the specialty of state ownership of enterprises is likely to make those big auditors behave in a differential manner. As most of the literatures on transition economy suggested, extra financial aids would be given to state-owned enterprises (hereafter SOEs) in case of on the verge of bankruptcy. As a result SOEs are less financially riskier than those in the private sector, which in turn discourages big auditors from taking seriously without fear of damage on their hard-earned reputation. On the contrary, Non-SOEs are vulnerable to economic fluctuation, more easily going bankruptcy. Under such condition, big auditors are obliged to function as precaution by improving the quality of accounting information of their non-politically-connected clients. Thus, I predict that big auditors would differentiate their clients in terms of the nature of ownership structure, ceteribus paribus.The second question is that whether big auditors have impact on lenders’credit decision, or in other words, does their reputation bring actual benefit to the creditors, if it does, private debt market should responds, such as lowering the debt cost etc., to clients in private debt market. And market rest greatly upon auditor reputation to judge how reliable of financial statements which jointly produced by both management and auditors are and proceed to make decision because of impossible access to direct observation of audit service. Empirical evidences have been given to support such argument. Yet most studies on auditor reputation in China are focusing on IPO market, few attention was paid on private debt market. Though the complexity of institutional settings of transition economy is, I am driven to provide new theoretical insight into this question and empirical result as well.As I combine the first one with second, the third question arises, even if big auditors discriminate between SOEs and Non-SOEs in terms of nature of ownership, applying its code more strictly to one than another, auditor reputation stands equally well on capital market regardless of differential audit quality SOEs and Non-SOEs perceived respectively, attributing to the obstacle to direct observation of audit quality. Further I predict that for SOEs, retaining big auditors by SOEs remained as an effective manner to signal capital market positively as Non-SOEs do. However, such signaling could be in fact concluded as "fake".Using a sample of2682list companies in China’s A share capital market during2006～2008,I investigate the three questions proposed above and find that (1) Big auditors act according to types of corporation based on ownership, more strictly to Non-SOEs with fear of damage on long-established reputation as they have looked through SOEs would be exceptionally saved in case of the financial distress, meaning the less likely on audit failure.(2) Auditor reputation hold equally same on both SOEs and Non-SOEs in private debt market as it did in IPO market supported by recent literatures, implying except harsh legal supervision, reputation does function as a substitution mechanism to organize financial resources efficiently.(3) the obstacle to direct observation of audit quality spares the room for opportunism behavior of big auditors, private debt market is not able to distinguish different audit quality received by SOEs and Non SOEs respectively even if they tactfully provide different audit quality with clients.The paper contributes to existing literatures in several ways.(1) Rather than focusing on institution settings of developed countries, I provide new theoretical analysis and empirical evidence in respect of the association of audit quality and auditor reputation under the condition of transition economy.(2) Recent literatures seems to be contradictory concerning on the behavior of big auditors, I am motivated to provide further insight into "the opportunism behavior of big auditors" and empirical evidence show how they act according to types of corporation based on ownership, greatly enriching our understanding about what so-called "big auditors"... |
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