High-speed Railway, Audit Partner Changes across Audit Offices, and Audit Quality: Evidence from China

高速鐵路、審計合夥人分所間輪換與審計質量:來自中國的證據

Student thesis: Doctoral Thesis

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Award date19 Aug 2020

Abstract

The allocation of human resources is one of the important factors affecting audit quality. Audit firms in China have experienced large-scale expansion since 1997 through mergers or setting up new audit offices. However, the distribution of human resources in each audit office is not balanced. Approximately 50% of audit offices have no more than two audit partners. Moreover, the mandatory individual auditor rotation requirement since 2003 has created challenges for audit firms’ audit partner allocation among audit offices. As such, how do audit firms solve the problem of audit partner constraints through human resource allocation? How do the solutions affect audit behavior? Existing literature pays little attention to these questions.

Interviews with Chinese domestic audit firms suggest that audit firms can rotate clients to another branch office in the same audit firm (i.e., audit partner changes across audit offices), so as to ease the constraints of audit partners and improve the efficiency of human resource allocation within audit firms. Audit partner changes across audit offices involve potential costs. The new economic geography states that geography and transportation factors are closely related to economic behavior. Combined with the new economic geography, audit partner changes across audit offices involve travel time and transportation costs for auditors. With the development of high-speed railway (HSR) network in China, does HSR between clients and audit offices promote audit partner changes across audit offices? How do audit partner changes across audit offices affect audit quality?

This thesis intends to conduct a systematic investigation on the relationship among the availability of HSR, audit partner changes across audit offices, and audit quality. The empirical tests in this study include two parts. First, this thesis examines the relationship among the availability of HSR, human resource constraints of audit partners in audit offices, and audit partner changes across audit offices. Results of the empirical tests show that the advent of HSR between clients and audit offices increases the probability of audit partner changes across audit offices. The effect is stronger for clients that were audited by predecessor audit offices with human resource constraints. Moreover, HSR availability increases the likelihood of audit partner changes across audit offices only in HSR transportation with optimal distance interval, and audit partner changes across audit offices are more likely to occur between small audit offices and big audit offices. These results have implications for audit firms’ human resource management in light of infrastructure improvements.

Second, this thesis further examines the effect of audit partner changes across audit offices on audit quality. Empirical tests show that audit partner changes across audit offices significantly reduce clients’ discretionary accruals and their probability of accounting restatements or receiving sanctions due to accounting irregularities. In particular, voluntary audit partner changes across audit offices, audit partner changes from small to big audit offices, and reciprocal win–win audit partner changes across audit offices (i.e., two audit offices receive clients switched from each other) improve audit quality significantly. Moreover, evidence suggests that audit partner changes across audit offices significantly increase audit effort (proxied by audit report lags). However, it has no effect on audit fees.

This thesis contributes to the literature in the following ways. First, this thesis provides a better understanding of the human resource allocation mechanism within audit firms by focusing on audit partner changes across audit offices within the same audit firm. Second, this thesis adds to the literature about the positive micro-externality of HSR availability for audit firms’ internal human resource allocation by exploring the impact of the availability of HSR on audit partner changes across audit offices. In addition, this thesis captures the impact of HSR on capital markets from the perspective of audit firms. Third, this thesis introduces transportation cost and time cost factors into the theoretical analysis framework of audit partner changes across audit offices to analyze the factors affecting audit partner changes across audit offices. Fourth, this thesis explores the effect of audit partner changes across audit offices on audit quality, audit fee, and audit effort.

    Research areas

  • Audit partner changes across audit offices, High-speed railway, Human resource constraints of audit office, Audit quality, Audit fee, Audit effort