Executive Violations、Audit Reputation And Market Reaction

The reputation mechanism is an important system which maintains the orderly operation of the audit market and has been closely watched by auditors.Previous research has been carried out in three aspects:the formation mechanism of audit reputation,the mechanism of audit reputation and the damage and repair mechanism of audit reputation.For the research of audit reputation damaged and repair mechanism,scholars mainly study from three angle:the administrative penalty,civil litigation and corporate financial cases involved the audit failure and obtained the certain achievement.However,these studies ignored one question that general audit failures are not similar to Enron’s major financial scandal,but are auditing collusion behavior.Throughout executives violations in recent years,they rend to be exposed by Throughout the executives violations events happened in recent years,they trend to be exposed by the securities regulatory commission or stock exchange,the auditors do not expose these executives violations in the process of auditing.For this kind of phenomenon,there are two views,one view think that some senior executives violations do not necessarily involve financial statement fraud.so certified public accountants who audit the credibility of the financial information do not need to take any responsibility for these corruption.But another view is that whether corruption of executives involves the financial fraud inevitably or not,as long as the corruption happened,According to the theory of the GONE,it means that there is some problems about company’s governance or internal control system,so certified public accountant who is a kind of external governance mechanism should take the corporate governance and internal control into account and note it in the audit report.And auditors have to communicate with executives when they provide audit services to the company,and a lot of information is obtained through executives.therefore,once corruption of executive was exposed,the social public will produce a negative impression about this executive,and then according to the ancient proverb "A fire happened in the city,the fish will be hurted ".so social public under psychological thinking from the evil effects,social public will produce a negative impression about this listed company and its presiding certified public accountant.according to the theory of different audit expectation,information users always hope that auditor can prevent and found all wrong in company to guarantee their interests against any loss.so when corruption of executive was exposed,information users believe their interests are damaged and the auditor failed to play a supervision and protection.As a result ’information users will question the quality of this auditor.in addition,the reputation is the general evaluation of a person or object by public,and is a unique characteristic or trait belong to someone or something.so auditors’ reputation is the general evaluation by public and is a unique characteristic or trait belong to auditors.it has a very strong subjectivity and depends on people’s impression and cognition.Until now,the study of auditor reputation mainly focus on these two angle,audit failure and administrative punishment,but these two angel mainly focus on auditors’professional skills or independence.but as we know the influence of audit reputation is not limited to the professional competence and independence.the external social network will have an impact on the auditors,reputation so according to the theory of reputation,the audit expectation gag theory and agency theory,from the perspective of customer transmitted to auditor,we research the impact on auditor reputation from executive violation as well as the economic consequence of auditors and their clients from this reputation influence.We use the methods of normative analysis and empirical test.In first we introduce the selected topic background and the topic meaning,then we review the related literature of executive violations,audit expectation gap and audit reputation mechanism.We reason and put forward the relevant assumptions.in the empirical analysis part,we see the A-share listed company executive violations from 2007-2015 as an sample,we research the impact on auditor reputation from executive violation.We found that:(1)we put all executive violations into the scope of inspection and found that executives violations have a certain influence on audit reputation.after illegal punishment of executives of listed companies,the market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has been verified in stock market that the market investors question the quality of the earnings announcements which are the clients of auditors with damaged reputation.the earnings response coefficient of clients of auditors with damaged reputation are lower.then form the angle of audit fee,after executives violation,market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has been verified in audit market that the audit fee of auditors with damaged reputation are lower.secondly from the point of audit change,after executives violation,market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has been verified in audit market that the probability of the audit change of clients of auditors with damaged reputation are higher.finally,from the prospective of audit quality changing,after executives violation,although the market investor reduce the corresponding auditor reputation evaluation,but the auditors does not improve audit quality by taking measures to restore reputation.(2)we put the executive violations related the annual report into the scope of inspection and found that executives violations also have a certain influence on audit reputation.after illegal punishment of executives of listed companies,the market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has been verified in stock market that the market investors question the quality of the earnings announcements which are the clients of auditors with damaged reputation.the earnings response coefficient of clients of auditors with damaged reputation are lower.then form the angle of audit fee,after executives violation,market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has been verified in audit market that the audit fee of auditors with damaged reputation are lower.secondly from the point of audit change,after executives violation,market investors will reduce the corresponding auditor reputation evaluation,and the reduced reputation evaluation has not been verified in audit market that the probability of the audit change of clients of auditors with damaged reputation are not higher.finally,from the prospective of audit quality changing,after executives violation,although the market investor reduce the corresponding auditor reputation evaluation,but the auditors does not improve audit quality by taking measures to restore reputation.From what has been discussed above,we fount that when the exposure of executive violations,the investors trend to make character attribution to auditors from the perspective of interest protection.and driven by the demons effect,they have a negative impression of auditors related with executive violation which make the reputation damaged.and the damaged reputation will have negative economic consequences for auditors.but the auditors do not take measure by improve quality to restore reputation.therefore,we think looking the executive violation as an indicator of damaged reputation,from the viewpoint of customer transmitted to auditors to research the effectiveness of the reputation mechanism.it expand the the research of executives violations and auditor reputation.at the same time,we also provide the empirical evidence to auditors that help them to understand the market concealed punishment to auditors because of executive violations and make them pay more attention to executive violations,to urge auditors to make violation governance.and we also remind the auditors that the customer choice has a certain impact on the audit reputation.