Research On Scarcity Of Audit Specific Investment

Before accounting firms accept their clients, some investigation must be done,accounting firms must get to know the industry environment of their clients andclients information, this can be considered as a special investment, and it will affectaudit quality. Since the audit market of China is a typical monopoly-competitionmarket, Accounting firms have economic dependence on their clients, their initialbargaining power are weak. Based on cost-benefit considerations, ccounting firmsare lack of the incitation to conduct a high level of specific audit investment, this hasbecome an obstacle for the Chinese audit market to get a high quality audit.Based on Incomplete Contract Theory, this paper is mainly focused on theshortage of specific audit investment. In order to get close to a real audit market, thispaper revised an assumption of the traditional GHM model, created a audit hold-upmodel under the condition of information asymmetry, analyzed the current status oflacking of specific audit investment. Since the studies existed have its limitations, thispaper brings two factors into this model, which are specific audit investment cost andaudit reputation effect, from both static and dynamic standpoint, we discussed whateffect it has after bringing about these two factors. firstly,’Hidden information’ whichis caused by information asymmetry will decrease the investment cost for powerfulaccounting firms but increase the investment cost for powerless accounting firms,secondly, if the specific audit investment cost will bring effect to the bargainingpower for both sides, accounting firms will be more stimulated to invest, thirdly, auditreputation effect will also have effect on the level of specific audit investment, lastly,whether the hold-up action will have influence on specific investment depends on thebargaining power and reputation effect, besides, under contain conditions, accountingfirms may conduct a specific audit investment which is the best for our society.At last, In order to improve the level of specific audit investment for a highquality audit, firstly, trust mechanism should be built, secondly, it is very importantfor accounting firms to improve their professional proficiency, what’s more, it isnecessary to establish a dominative auditing market.