Client Demand and Audit Quality: Evidence from A-Share Firms in China
Article Sidebar
Main Article Content
Abstract
This study examines the relationship between client demand attributes and audit quality in the Chinese capital market. Drawing on 2,878 firm-year observations of A-share listed companies from 2021–2023, audit quality is proxied by discretionary accruals estimated using the Modified Jones Model. Client demand is operationalized through incentive factors (dividend policy and firm value) and competency factors (board independence and directors’ remuneration). The baseline results reveal that client-demand attributes exert only a limited influence on audit outcomes. The heterogeneity analysis further indicates that these attributes remain largely insignificant among state-owned enterprises (SOEs), whereas board independence plays a modest role in constraining earnings management in non-SOEs. Robustness tests using signed discretionary accruals confirm the stability of the findings and additionally suggest that dividend policy may mitigate managerial discretion when the direction of accruals is considered. This study contributes to the auditing literature by delineating the boundary conditions under which client demand affects audit quality and offers practical implications for regulators and investors in emerging markets.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
The articles published in the journals are the authors' opinions, not the opinion of the editorial team or administrative staff. The articles published is copyright of the Journal of Business Administration and Accounting, Khon Kaen University.
References
Afza, T., & Sajid Nazir, M. (2014). Audit quality and firm performance: Evidence from Pakistan. International Journal of Quality & Reliability Management, 31(6), 713–722.
Bae, G. S., Choi, S., Lamoreaux, P. T., & Lee, H. Y. (2021). Internal control quality and audit pricing: Evidence from Korea. Auditing: A Journal of Practice & Theory, 40(1), 1–26.
Bae, K.-H., Kang, J.-K., & Wang, J. (2021). Does board independence matter for firms with concentrated ownership? Journal of Financial Economics, 139(2), 483–508.
Bakri, H. H. M. (2021). Audit quality as a moderating variable to the relationship between dividend policy and firm value. Cogent Business & Management, 8(1), 2004807. https://doi.org/10.1080/23311975.2021.2004807
Bell, T. B., Causholli, M., & Knechel, W. R. (2015). Audit firm tenure, non-audit services, and internal assessments of audit quality. Journal of Accounting Research, 53(3), 461–509.
Bhaskar, L. S., Krishnan, G. V., & Yu, W. (2017). Debt covenant violations and the differential timeliness of accounting conservatism. The Accounting Review, 92(2), 77–102.
Bin Wu, A., Li, A., & Zhang, W. (2022). Client strategic change and audit quality: Evidence from China. China Journal of Accounting Research, 15(2), 143–160.
Bo, H., & Wu, C. (2011). Ownership structure, agency conflicts, and audit pricing: Evidence from China. China Journal of Accounting Research, 4(2), 69–85.
Bryan, D. B., & Mason, T. W. (2020). Independent director reputation incentives, accruals quality, and audit fees. Journal of Business Finance & Accounting, 47(3–4), 383–408.
Bryan, S., & Mason, C. (2020). Executive compensation and corporate governance: Evidence from emerging markets. Journal of International Business Studies, 51(8), 1371–1393.
Carcello, J. V., Hollingsworth, C. W., Klein, A., & Neal, T. L. (2011). The role of audit committee in constraining earnings management: Evidence from voluntary turnover of board members. The Accounting Review, 86(4), 1105–1138.
Chen, C., Hribar, P., & Melessa, S. (2018). Incorrect inferences when using residuals as dependent variables. Journal of Accounting Research, 56(3), 751–796.
Chen, H., Chen, J. Z., Han, J., & Yuan, Z. (2022). The labor market consequences of audit failures: Evidence from China. Journal of Accounting Research, 60(2), 447–494.
Chen, H., Kim, J. B., & Yao, L. J. (2021). Dividend policy and stock price crash risk: International evidence. Journal of Corporate Finance, 66, 101800.
Chen, J., Liu, M., & Li, W. (2010). Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 16(2), 217–236.
Chen, X., Li, X., & Zou, H. (2021). Debt financing and audit pricing: Evidence from China. China Journal of Accounting Research, 14(2), 143–160.
Chen, Y., Luo, Y., Tang, Q., & Tong, H. (2022). Firm complexity and audit pricing: Evidence from China. Asia-Pacific Journal of Accounting & Economics, 29(5), 492–513.
Chi, W., Huang, H., Liao, Y., & Xie, H. (2018). Mandatory audit partner rotation, audit quality, and market perception: Evidence from China. Contemporary Accounting Research, 35(1), 314–346.
Chi, W., Liao, Y., & Lin, Z. (2022). Reputation and pricing of Big Four auditors: Evidence from the COVID-19 outbreak. International Journal of Auditing, 26(2), 291–307.
Conyon, M. J., He, L., & Zhou, X. (2015). Executive compensation and corporate governance in China. Journal of Corporate Finance, 32, 29–49.
DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.
DeFond, M. L., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2–3), 275–326.
Farinha, J., & Moreira, J. A. (2017). Dividend policy and earnings quality. Review of Accounting and Finance, 16(1), 105–124.
Firth, M., Mo, P. L. L., & Wong, R. M. K. (2012). Auditors’ organizational form, legal liability, and reporting conservatism: Evidence from China. Contemporary Accounting Research, 29(1), 57–93.
Francis, J. (2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory, 30(2), 125–152.
Francis, B., Hasan, I., & Wu, Q. (2013). The benefits of conservative accounting to shareholders: Evidence from the financial crisis. Accounting Horizons, 27(2), 319–346.
García Osma, B., Mora, A., & Camacho-Miñano, M. (2022). Audit quality and complex firms: Evidence from European markets. Accounting and Business Research, 52(4), 416–439.
García-Ramos, R., & Díaz, B. D. (2021). Board structure and audit committee independence in Europe. European Management Journal, 39(2), 223–234.
Gietzmann, M., & Pettinicchio, A. (2014). Regulatory scrutiny and audit fees: Evidence from SEC comment letters. The Accounting Review, 89(6), 2265–2297.
Gul, F. A., Ma, S., & Lai, K. M. (2017). Political connections and auditor choice: Evidence from Chinese SOEs. Auditing: A Journal of Practice & Theory, 36(1), 117–138.
He, X., Pittman, J. A., Rui, O. M., & Wu, D. (2016). Do social ties between external auditors and audit committee members affect audit quality? The Accounting Review, 91(3), 695–718.
He, X., Pittman, J., Rui, O., & Wu, D. (2017). Do social ties between external auditors and audit committee members affect audit quality? The Accounting Review, 92(5), 61–87.
Hu, H., Tam, L., & Tan, H. (2022). State ownership, auditor choice, and audit quality in China. Journal of International Accounting Research, 21(2), 113–132.
Hu, Q., Muhammad, J., & Yang, J. (2022). Ownership concentration and audit quality: Evidence from China. Journal of International Accounting Research, 21(2), 123–145.
Huang, Y., Rose, C., & You, H. (2021). Executive compensation structure and financial reporting quality: Evidence from China. International Review of Financial Analysis, 78, 101974.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Knechel, W. R., Mao, J., Qi, B., & Zhuang, Z. (2021). Is there a brain drain in auditing? The determinants and consequences of auditors’ leaving public accounting. Contemporary Accounting Research, 38(4), 2461–2495.
Knechel, W. R., & Sharma, D. S. (2020). Auditor-provided non-audit services and audit quality: New evidence. The Accounting Review, 95(5), 97–124.
Kreps, D. M. (1990). Corporate culture and economic theory. In J. E. Alt & K. A. Shepsle (Eds.), Perspectives on Positive Political Economy (pp. 90–143). Cambridge University Press.
Kreps, D. M., & Wilson, R. (1982). Reputation and imperfect information. Journal of Economic Theory, 27, 253–279.
Lennox, C., & Wu, J. S. (2022). A review of China-related accounting research in the past 25 years. Journal of Accounting and Economics, 73(2–3), 101368.
Lennox, C., & Wu, X. (2018). A review of China’s audit market: Institutional setting, unique features, and future research. China Journal of Accounting Research, 11(3), 237–261.
Li, J., Qi, A., Tian, G., & Zhang, H. (2021). Auditor changes and audit quality: Evidence from Chinese listed companies. International Journal of Auditing, 25(3), 668–688.
Li, X., & Xu, L. (2020). Do independent directors curb earnings management? Evidence from regulatory reforms in China. China Journal of Accounting Research, 13(3), 255–274.
Lin, S., & Hwang, M. (2023). The impact of board compensation on audit quality: Evidence from Chinese listed firms. Emerging Markets Review, 56, 100913.
Masulis, R. W., & Mobbs, S. (2014). Independent director reputation incentives: The impact of control environments on director actions. Journal of Financial Economics, 111(2), 430–449.
Masulis, R. W., & Mobbs, S. (2017). Reputation incentives of independent directors: Impacts on board monitoring and adverse outcomes. Journal of Financial and Quantitative Analysis, 52(5), 1987–2021.
Masulis, R. W., Wang, C., & Xie, F. (2012). Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53(3), 527–554.
Newton, N. J., Persellin, J. S., Wang, D., & Wilkins, M. S. (2016). Internal control opinions and auditor changes. The Accounting Review, 91(2), 551–580.
Persakis, A., & Iatridis, G. E. (2016). Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective. International Review of Financial Analysis, 41, 73–101. https://doi.org/10.1016/j.irfa.2015.12.004
Simunic, D. A., & Stein, M. T. (1996). The impact of litigation risk on audit pricing: A review of the economics and the evidence. Auditing: A Journal of Practice & Theory, 15(Supplement), 119–134.
Sila, V., Gonzalez, A., & Hagendorff, J. (2017). Independent director reputation incentives and stock price informativeness. Journal of Corporate Finance, 47, 219–235.
Trinh, V. Q. (2022). Financial reporting quality and dividend policy: International evidence. International Review of Financial Analysis, 81, 102078. https://doi.org/10.1016/j.irfa.2022.102078
Wang, L., Yu, J., & Wu, S. (2021). Board independence, internal governance and audit quality: Evidence from China. Journal of International Accounting, Auditing and Taxation, 43, 100399.
Yu, J., & Zhang, S. (2023). Debt governance and financial reporting quality: Empirical evidence from China. Accounting and Finance, 63(2), 305–329.
Zhou, H., Chen, X., & Xu, T. (2022). Regulatory changes, audit quality, and earnings management: Evidence from post-2018 Chinese reforms. Pacific-Basin Finance Journal, 74, 101753.
