Does joining global accounting firm networks and associations affect audit quality and audit pricing? Evidence from China

Abstract

This study investigates the impact of accounting firms joining global accounting firm networks and associations (AF N&As) on audit quality and audit pricing in China. We find that after their accounting firms join global AF N&As, client firms’ accrual-based earnings management is reduced. However, we find no evidence that audit fees are significantly affected. Cross-sectional analysis suggests that improvements in audit quality resulting from accounting firms joining global AF N&As are more pronounced when auditors have less audit experience, clients have more subsidiaries or auditor tenure is shorter. Additional tests suggest that joining AF N&As reduces the likelihood of accounting firms being dismissed by clients and increases the market share of the accounting firms.

Keywords:

• accounting firms
• networks
• associations
• audit quality
• audit pricing

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability

All data used in this study are publicly available from the sources identified in the text.

Notes

1 There are at least three reasons why there are systematic differences between Chinese accounting firms with global AF N&A membership and those without. First, global AF N&A membership is subject to a pre-approval process, which includes consideration of peer recommendations, client service and quality control (Bills et al. 2016). Second, the willingness of accounting firms to apply to join global AF N&As is not random. Third, CICPA provides different incentives for joining global AF N&As for accounting firms of different sizes, as described in the next section.

2 The Fourth Way of Internalization of Local Accounting Firms, DA Hua, 2013, Vol. 2.

3 https://www.kreston.com/become-a-member/

4 We interviewed an audit partner of Grant Thornton China (a member firm of Grant Thornton International Ltd (GTIL) in China). He confirmed that Grant Thornton International Ltd requires its member firms to be subject to regular, globally-coordinated, internal quality assurance reviews and use GTIL audit tools on all applicable assignments, and that membership may be revoked if a member firm seriously breaches its obligations.

5 Qi Chacha (www.qichacha.com) is a popular firm information inquiry system in China, which provides a wealth of data on various firms including accounting firms. We can identify whether a Chinese accounting firm is or was a member of a global AF N&A and when it joined that global AF N&A if yes based on the development history and important events of the accounting firm provided by Qi Chacha.

6 We first attempted to match each treatment observation with one control using the above stated criteria, but this leaves a few unmatched observations. To retain more treatment observations, we then tried to find a match for each of them in the existing control group. This method gives rise to 10 more observations in the treatment group than in the control group. Untabulated results show that deleting these 10 observations does not change the conclusions of this paper.

7 Before3_i,t : A dummy that equals one if a firm-year observation is 3 years before the year of joining and zero otherwise; Before1_i,t: A dummy that equals one if a firm-year observation is 1 year before the year of joining and zero otherwise; After1_i,t: A dummy that equals one if a firm-year observation is 1 year after the year of joining and zero otherwise; After23_i,t: A dummy that equals one if a firm-year observation is 2 or 3 years after the year of joining and zero otherwise.

8 The above results may be affected by the small sample size (96 audit firm-years).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China (No.71772039, No.71790604, No.71932001), the National Social Science Foundation of China (No.14BGL183), the Fundamental Research Funds for the Central Universities in UIBE (No.18JQ06) and Teacher’s Research Seed Plan in BISU (No.545001/017).