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    Client Importance, Institutional Improvements, and Audit...
    research summary posted May 7, 2012 by The Auditing Section, last edited November 8, 2012 by Judy Cothern, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
    Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis
    Practical Implications:

    This study uses engagement-level audit partner data, to analyze whether audit quality is driven by client importance at the office- or partner-level.  Overall, the results contribute to evidence showing that investor protection rules and laws at the country-level are associated with engagement-level audit quality.  This indicates the importance of strong investor protection regulations.  These results may be of interest to shareholders and securities market regulators, especially in developing economies, transitional economies, or economies where such regulations are weak.  Additionally, these results may be of interests to auditors in countries with such economies.  Finally, to the extent that audit firms serve clients with investors that receive varying levels of protection (i.e. public vs. private or a “well-known seasoned issuer”), these results may indicate opportunities for such firms to enhance audit requirements for certain non-public engagements. 

    The results of this study also suggest that audit accountability at the individual level makes auditors more sensitive to the costs of audit failure.  This result may have implications for auditor accountability from a regulatory standpoint, as well as an audit firm policy standpoint.


    Chen, S., S. Y. J. Sun, and D. Wu. 2010. Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis. The Accounting Review 85 (1): 127-158.

    international matters, audit quality, quality control, client importance, litigation, audit-reporting decision
    Purpose of the Study:

    This study addresses the broad question of whether the economic importance of a client impairs audit quality.  The authors use Chinese data to: 

    • Investigate whether institutional improvements in a country's investor protection environment affect engagement-level audit quality.
    • Examine the relationship between client economic importance to the individual auditor (individual engagement partners) and audit quality in China.
    Design/Method/ Approach:

    The authors use a sample of 8,917 client firm-year observations from 1995 to 2004 where 1995 to 2000 is the low investor protection period and 2001 to 2004 is the high investor protection environment following changes by the Chinese Supreme Court to heighten investor protection rules. Audit quality is measured using the probability of the auditor issuing a modified audit opinion.  Client importance is measured using the ratio of individual client assets to the total client assets audited at both the office level and partner level.

    • Client importance at the partner level impaired audit quality during a period when investor protection was weak (1995-2000).
    • Auditors appear to have become more conservative after improvements were made to investor protection rules and laws.  This is evidenced by a positive correlation between audit quality and client importance at the partner level from 2001-2004.
    • Client importance at the office level is not significantly associated with audit quality in either period (1995-2004).
    • Audits that received a sanction by the Chinese government as an audit failure were more likely to be for clients of high importance to the auditor in the pre 2001 period and were more likely to be for clients of low importance to the auditor in the post 2001 period.
    Independence & Ethics, Accountants' Reporting, International Matters
    Impact of Fees on Decisions by Auditors & Managmeent, Going Concern Decisions, Going Concern Decisions, Audit Partner Identification by Name
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