Does Access to Developed Audit Markets Improve Home Audit Quality? Evidence from China

Accounting and Business Research, Forthcoming

60 Pages Posted: 8 Jul 2021

See all articles by Kevin C. K. Lam

Kevin C. K. Lam

Hang Seng Management College; The Chinese University of Hong Kong (CUHK) - School of Accountancy

Julia Liu

The Hang Seng University of Hong Kong

Rita Yip

The Hang Seng University of Hong Kong

Date Written: June 29, 2021

Abstract

In December 2010, Hong Kong regulators allowed 12 mainland Chinese registered audit firms to audit companies incorporated in mainland China and listed in Hong Kong (H-shares). In this study, we examine whether access to the Hong Kong audit market improves the quality of audits conducted by these Chinese audit firms for clients listed in the mainland markets (A-shares). Using data from 2008 to 2016, we find that mainland auditors with H-share clients provide higher quality audits, as measured by more modified audit opinions, higher audit fees and less earnings management, than auditors without H-share clients. This effect is more pronounced when the auditors are non-Big 4 firms and the clients are listed only in mainland China. Further analysis shows that A-share investors react positively to the initial announcement that mainland auditors are permitted to conduct H-share audits. Overall, our findings suggest that H-share audits have a positive spillover effect on the quality of A-share audits.

Keywords: audit quality, Big 4, non-Big 4, China, H-share, spillover

JEL Classification: M42, M48

Suggested Citation

Lam, Kevin C. K. and Liu, Julia Junxia and Yip, Rita, Does Access to Developed Audit Markets Improve Home Audit Quality? Evidence from China (June 29, 2021). Accounting and Business Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3876336

Kevin C. K. Lam

Hang Seng Management College ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Julia Junxia Liu (Contact Author)

The Hang Seng University of Hong Kong ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

Rita Yip

The Hang Seng University of Hong Kong ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

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