The accountability system for operation and investment and audit quality of state-owned enterprises

Based on the accountability system for illegal operation and investment of state-owned enterprises (SOEs), this paper uses A-share listed companies in China from 2013 to 2021 as a research sample to empirically test the impact of operation and investment accountability on the audit quality of firms. The results show that after the implementation of the accountability system, the audit quality of SOEs is significantly improved, and the results hold after a series of robustness checks. Mechanism tests suggest that reducing misconducts of managers, inhibiting earnings management and improving the quality of internal control can explain the effects of operation and investment accountability. Heterogeneity analyses suggest that the positive effect of operation and investment accountability on the audit quality of SOEs is more pronounced for firms in poor business environment, with low level of digital transformation and low degree of mixed-ownership reform. Further tests on economic consequence suggest that operation and investment accountability increase economic value added of state-owned assets by improving the effectiveness of auditing supervision. This paper extends the stream of literature on SOEs' auditing from the perspective of accountability, and provides practical implications on improving the quality of government monitoring measures and promoting the update of governance capacity and governance system.