Audit Office Number, Size and Audit Quality
Student thesis: Doctoral Thesis
Related Research Unit(s)
In recent years, increasing attention has been drawn to the effect of the size and number of the branches of a CPA firm on audit quality. Since 2000, Chinese government has released a series of policies to encourage CPA firms to scale up, in which CPA firms are allowed to expand by setting up branches or through merger and acquisition. Under the guidance of those policies, the local CPA firms in China have been empowered to accelerate their business expansion in terms of the number and the size of the branch offices. In 2003, Ruihua, the largest local CPA firm after a merger between two large local CPA firms, beat Earnest & Young and KPMG by annual revenue, and became the third largest CPA firm in China. This ended the era in which the Big Four were always ranked the top 4 in China market.
With the rapid expansithesison of local CPA firms, however, doubts and worries have surfaced in the profession to question whether their audit quality has also been improved. Does more branch offices mean higher audit quality? Which has greater effect on audit quality, the main office size or the branch office size? And whose size has greater effect on audit fee?
In such context, this thesis reviews the related domestic and overseas researches, and studies the effect of the number of the branches, the main office size and the branch office size on audit quality and audit fee, using the listed companies audited by the eight largest local CPA firms from 2011 to 2013 as sample.
This thesis first explores the relationship between the main office size, the branch office size and the audit quality. The correlation results show that, audit quality is more affected by the main office size than that of the branch office. The reason this thesis puts forward is that, in the inorganic expansion model, the main office has central review and control over the audit quality, therefore, the main office size, instead of that of the branch office, has greater effect on audit quality.
Moreover, this thesis studies the effect of the main office size and the branch office size on the audit fee which is set as a dependent variable in the study. The result shows, although both the main office and the branch office have effect on the audit fee, the branch office size has greater effect. This can be explained that the clients are developed by the branch office, and the audit fee is negotiated between the branch office and the clients. Therefore, the negotiation power of the branch office in the local market affects the audit fee more.
This thesis contributes to the literature by examining the effect of the main office size and the branch office size on audit quality and audit fee, which creates a new research direction for the related research in China. Also, the research in this thesis is a good supplement to the overseas researches in the same arena. The author hopes the research conclusions from this thesis will provide a new perspective to the research on audit quality and the branch office size, and be of help to the regulators in China when they develop future development directions and regulatory policies.