Audit Quality Auditor Size and Legal Environments


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This study examines the impact of auditor size on audit quality at the audit associate level. The size of the auditor is defined by three criteria: the assets of the audit partners; the size of the partners` client portfolios; and the number of audit associates in the company. Using data from China that requires disclosure of the audit partner`s identity, I hypothesize and note that an audit partner`s personal assets have two implications for audit quality: the revenue effect and the substitution effect. The Chinese audit market is particularly suited to the study of these two effects. Prior to 2010, most accounting firms in China were organized in the form of limited liability companies, where the personal assets of an audit partner were protected from legal liability. In 2010, however, all accounting firms in China had to reorganize into limited liability companies, where negligent audit partners had unlimited liability. I note that the assets of an audit partner had a negative impact on audit quality during the period 2007 to 2009, whereas during the period from 2010 to 2012, the assets of an audit partner had an inverse U-shaped ratio to audit quality. Unlike previous studies, I look at two aspects of client portfolio size for an audit partner: the total assets of an audit partner`s client portfolio, which measures occupancy effect; and all of an audit partner`s audit fees, which measure the total of its quasi-rents. I note that the total assets of an audit partner`s client portfolio have a negative correlation with audit quality, while an audit partner`s total audit fee is positively related to audit quality. In addition, I note that the number of audit partners in an audit firm is negatively related to the quality of the audit. Audit quality and accumulation quality: Do the 4 major auditors really improve the quality of accumulation of «strong» customers? Auditor Size and Audit Quality: A Partner-Level Perspective The Auditor Reporting Profit Management: Some Additional Evidence.

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