Research On The Economic Consequence Of RH Certified Public Accountants' Reputation Damage

The quality of auditing runs through the audit industry.Independence auditing is an effective mechanism to improve the credibility of accounting information and to alleviate the cost of principal-agent.The extent of its role depends on the quality of auditing.From the decision-making between the upper-level partner and the client company of the audit process to the draft of the lowest-level auditor,the concept and standards of audit quality have always led the various behaviors of the accounting firm industry.Concerns about audit quality have led to market concerns about auditors' professional competence and independence.However,due to the abstraction and non-measurement of these two elements,the market has turned its attention to the reputation of accounting firms and CPA individuals.That is to say,audit quality is divided into two dimensions: the true audit quality brought by the auditor's supervision and the audit quality brought by the market-aware auditor's reputation.(Watkins et al 2004)The reputation of accounting firms and auditors has become a convenient standard for measuring the quality of audits.On February 22,2017,the Accounting Department of the Ministry of Finance and the Accounting Department of the China Securities Regulatory Commission jointly issued the “Notice on Ordering RH Certified Public Accountants(Special General Partnership)to Suspend the New Securities Business and Renovate Within a Time Limit”.RH Certified Public Accountants(special general partnership)was ordered to suspend the new securities business from January 6,2017.The punishment has a huge impact on RH's reputation,which has caused RH's serious reputation damage.After RH suffered such a serious reputation damage,did it weaken the public's evaluation of its audit quality,which in turn affected the market's judgment on the value of its audit client company? Has the market responded to the customers that RH has presided over,such as the reputation mechanism assumptions? Has RH's reputational damage caused an effective impact on its customers,business,audit fees,and internal control management? After RH's reputation was damaged,did it effectively rectify itself according to the requirements of the Ministry of Finance and the CSRC? In view of the above problems,this paper has a high practical significance for the case study of RH Certified Public Accountants' reputational damage.This paper uses the combination of empirical analysis and comparative analysis to study the economic consequences of reputation damage.Specifically,this paper firstly takes the case of abnormal stock return rate and abnormal trading volume of RH's customer review as empirical indicators,and conducts empirical research from three perspectives: overall customer,large-scale customer and relatively high risk customer.In order to illustrate the feedback response of the market after RH suffered a reputation damage.In addition,this paper analyzes the impact of audit failure on the firm from the aspects of customer portfolio,audit fees,brain drain and internal control management after the reputation damage,and explores whether RH is under the reputation.After the damage,there are measures to strengthen internal management and improve audit quality.Through the research on the reputation damage case of RH Certified Public Accountants,this paper finds that the abnormal return rate of RH's listed company was significantly negative from the four days before the announcement date,and the abnormal transaction volume was not equal to 0,confirming the negative impact of reputation damage on the stock price of the listed company's clients,reflecting the impact of reputation damage on RH from the customer level.For RH itself,reputation damage has brought obvious negative economic consequences to RH,and it has brought obvious impacts on audit fees,customer numbers,customer size,and brain drain.However,RH did not implement positive and obvious improvement measures for its internal control management and audit quality management.The research in this paper is that accounting firms should face industry norms,learn from the reputation damage,and improve their professional competence and independence.