The dark side of audit market competition

• 成果类型: Article
• 署名作者: Pan, Yue; Shroff, Nemit; Zhang, Pengdong
• 署名单位: Xiamen University; Massachusetts Institute of Technology (MIT); Sun Yat Sen University
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2022.101520
• 发表日期: 2023
• 关键词: earnings; QUALITY; determinants; STANDARDS; accruals

摘要

This paper examines the relation between audit market competition and audit quality. We use the staggered introduction of bullet trains in different Chinese cities as shocks to travel time between audit clients and prospective audit firms, which increases the threat of competition for incumbent audit firms. The inception of bullet train connectivity leads to a 4.5 percentage point (pp) increase in the probability of GAAP violations and a 1.7 pp decrease in the probability of modified audit opinions for clients headquartered in con-nected cities. Bullet train connectivity is also followed by a 1.6 pp decrease in income -decreasing audit adjustments but no change in income-increasing audit adjustments. The negative relation between bullet train connectivity and audit quality is 1) stronger when bullet trains put greater competitive pressure on incumbent auditors and 2) weaker when clients demand high audit quality. Our paper provides plausibly causal evidence that competition lowers audit quality.(c) 2022 Elsevier B.V. All rights reserved.