Case Analysis Of Contagion Effect Of Ruihua Audit Failure

In recent years,financial fraud in the capital market has emerged in an endless stream.Every time there is a public opinion,the blame will be directed at the audit institution,and it has become the norm to criticize the auditor as the culprit of fraud.In fact,there are indeed some black sheep in the industry,who are to blame and deserve to be punished.Auditing is a special service activity,which is mainly subject to comprehensive factors such as the professional quality and decision-making ability of auditors.Therefore,audit results are inevitably influenced by auditors.Independence is the soul of the auditor’s profession and the cornerstone of ensuring audit quality.If the auditors are so obsessed with their own interests that they cannot remain relatively independent,it will damage the vital interests of thousands of small and medium investors.In 2019,Kangde’s tens of billions of fraud incidents severely damaged investors’ confidence in the capital market,and also reflected the lack of accountability of audit institutions.Since 2016,its audit institution,Ruihua Certified Public Accountants,has experienced frequent occurrences of low audit quality caused by financial fraud,causing the public to question the professional ethics of the entire CPA industry.This makes us wonder,is an audit failure due to chance or a systemic flaw in the firm? Does a low-quality audit engagement by an accounting firm indicate that the firm’s overall audit quality is low? If there are other phenomena of low audit quality in the firm,does this indicate that there is a horizontal and vertical contagion effect on the audit quality of the firm? What are the factors that affect the contagion effect of audit quality?Social influence theory suggests that observers can imitate the behavior of others based on direct observation of their behavior and verbal communication of the outcome of that behavior or a preferred course of action.By observing and communicating with auditors who have a risk appetite and are accustomed to implementing loose audit procedures,it is found that auditors will be willing to join the ranks of risk-taking and begin to adopt audit procedures that do not conform to auditing standards.As described in The Economics of Imitation of Crime,when a person observes that bad auditing behaviors can bring financial benefits even without "side effects" and adverse outcomes,the likelihood that he will imitate those bad behaviors and commit crimes increases significantly(Sah,1991).Due to the close working relationship with the sanctioned auditor,the CPAs in the same firm are very likely toIVobserve the sanctioned auditor’s bad audit behavior during the "sickness period",and communicate and interact with them.After the "exposure" of the above-mentioned bad behavior,coupled with the risk premium of economic benefits,the team and colleague auditors are likely to change their risk appetite,and then learn lax auditing techniques,resulting in generally poor audit quality during the "sick period".Social influence studies have found that individual preferences and behavioral decisions in social networks are easily influenced by others in the same network(Jackson,2010).Individual behaviors ranging from individual investment decisions to overall corporate decisions can be propagated through social networks,ultimately affecting the output of the overall results.The result can be good or bad,but this thesis chooses to study the negative impact of auditing behavior on society.There are two main reasons for choosing to study the "bad" outcomes of social impact.First,the bad behavior of inferior auditors is mainly manifested in issuing low-quality audit reports,which will bring huge losses to the value of enterprises,while high-quality financial reports hardly bring value to enterprises(Zimmerman,2013).As a result,stakeholders and regulators are more inclined to focus on low-quality audits,which can have huge societal costs.Second,as the saying goes: if one does not do it for oneself,the heavens and the earth will perish.People are selfish,and there are very few people who can be purely selfless.As ordinary people,auditors generally choose the audit practice method that maximizes personal interests under the maximum risk cost that they can bear according to the principle of risk-benefit.Also,people are inherently averse to hard work and are used to getting something for nothing.Therefore,the dissemination and influence of auditors’ bad behavior in social network is particularly prominent,and it is a topic worthy of further study.This paper takes the Kangde Xin incident as the breakthrough point,and focuses on the influence of the auditor’s personal profit-seeking nature on the Kang De Xin incident and the audit quality contagion behavior in Ruihua Certified Public Accountants.The data presented based on the case study shows that there is a certain degree of audit quality contagion effect within Ruihua Accounting Firm,which has been merged for many times,and this contagion effect is likely to be the result of mutual learning between teams.The direct reason for the audit failure is that many of the merged auditors who came with "illness" sent a large number of "bad" auditors to Ruihua.The internal control system established after the merger also failed to effectively reduce the auditors’ own profit-seeking nature.The incidence of audit failures.The above research not only enriches the theory of audit quality contagion effect,but also provides a reference for subsequent firm mergers to improve quality.