IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v62y2022ics0275531922001039.html
   My bibliography  Save this article

Effect of auditor rotation violation on audit opinions and audit fees: Evidence from China

Author

Listed:
  • Zhang, Xuehua
  • Yan, Huanmin
  • Hu, Fang
  • Wang, Hongjian
  • Li, Xiaoning

Abstract

In the setting of the Chinese auditing regime, we identify a sample of “rotation-violation” auditors who continue to serve clients after the mandated rotation period has expired, and find that the occurrence of auditor rotation violation is driven more by supply-side factors than by demand-side factors or market institutional factors. By controlling the endogeneity problem using a treatment effects model, we find that rotation-violation auditors significantly issue more favorable opinions and are paid higher fees. These results support our proposed auditor–client collusion argument that rotation-violation auditors issue favorable opinions to clients in return for fee premiums. Further, we find that the collusion effects of auditor rotation violation are decreased by the existence of government control, audit firm location, and the regional market development in the Chinese environment. Our findings draw regulators’ attention to the real effects and enforcement of audit partner rotation.

Suggested Citation

  • Zhang, Xuehua & Yan, Huanmin & Hu, Fang & Wang, Hongjian & Li, Xiaoning, 2022. "Effect of auditor rotation violation on audit opinions and audit fees: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001039
    DOI: 10.1016/j.ribaf.2022.101715
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531922001039
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2022.101715?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
    2. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    3. Nicholas Dopuch & Ronald R. King & Rachel Schwartz, 2001. "An Experimental Investigation of Retention and Rotation Requirements," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 93-117, June.
    4. Wuchun Chi & Huichi Huang & Yichun Liao & Hong Xie, 2009. "Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 359-391, June.
    5. Berkman, Henk & Cole, Rebel A. & Fu, Lawrence J., 2010. "Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(6), pages 1391-1417, December.
    6. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    7. Mara Cameran & Annalisa Prencipe & Marco Trombetta, 2016. "Mandatory Audit Firm Rotation and Audit Quality," European Accounting Review, Taylor & Francis Journals, vol. 25(1), pages 35-58, May.
    8. K. Hung Chan & Donghui Wu, 2011. "Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China," Contemporary Accounting Research, John Wiley & Sons, vol. 28(1), pages 175-213, March.
    9. Li, Kai & Yue, Heng & Zhao, Longkai, 2009. "Ownership, institutions, and capital structure: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 471-490, September.
    10. Hanwen Chen & Jeff Zeyun Chen & Gerald J. Lobo & Yanyan Wang, 2011. "Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China," Contemporary Accounting Research, John Wiley & Sons, vol. 28(3), pages 892-925, September.
    11. Copley, Pa & Gaver, Jj & Gaver, Km, 1995. "Simultaneous Estimation Of The Supply-And-Demand Of Differentiated Audits - Evidence From The Municipal Audit Market," Journal of Accounting Research, Wiley Blackwell, vol. 33(1), pages 137-155.
    12. Gaver, Jennifer J & Gaver, Kenneth M, 1995. "Simultaneous Estimation of the Demand and Supply of Differentiated Audits," Review of Quantitative Finance and Accounting, Springer, vol. 5(1), pages 55-70, March.
    13. Feng Chen & Songlan Peng & Shuang Xue & Zhifeng Yang & Feiteng Ye, 2016. "Do Audit Clients Successfully Engage in Opinion Shopping? Partner‐Level Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 79-112, March.
    14. Watts, Ross L & Zimmerman, Jerold L, 1983. "Agency Problems, Auditing, and the Theory of the Firm: Some Evidence," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 613-633, October.
    15. Bradshaw, Mark & Liao, Guanmin & Ma, Mark (Shuai), 2019. "Agency costs and tax planning when the government is a major Shareholder," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 255-277.
    16. Ronna Cong & David M. Drukker, 2001. "Treatment effects model," Stata Technical Bulletin, StataCorp LP, vol. 10(55).
    17. Chen, Gongmeng & Firth, Michael & Gao, Daniel N. & Rui, Oliver M., 2006. "Ownership structure, corporate governance, and fraud: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 424-448, June.
    18. Firth, Michael & Rui, Oliver M. & Wu, Xi, 2012. "How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(1), pages 109-138.
    19. Lennox, Clive, 2000. "Do companies successfully engage in opinion-shopping? Evidence from the UK," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 321-337, June.
    20. Wang, Qian & Wong, T.J. & Xia, Lijun, 2008. "State ownership, the institutional environment, and auditor choice: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 112-134, September.
    21. E. Michael Bamber & Linda Smith Bamber, 2009. "Discussion of "Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan"," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 393-402, June.
    22. Firth, Michael & Fung, Peter M.Y. & Rui, Oliver M., 2007. "Ownership, two-tier board structure, and the informativeness of earnings - Evidence from China," Journal of Accounting and Public Policy, Elsevier, vol. 26(4), pages 463-496.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cao, Feng & Zhang, Xueyan & Yuan, Rongli, 2024. "Rookie independent directors and audit fees: Evidence from China," Research in International Business and Finance, Elsevier, vol. 69(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Bandyopadhyay, Sati P. & Chen, Changling & Yu, Yingmin, 2014. "Mandatory audit partner rotation, audit market concentration, and audit quality: Evidence from China," Advances in accounting, Elsevier, vol. 30(1), pages 18-31.
    3. Firth, Michael & Rui, Oliver M. & Wu, Xi, 2012. "How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(1), pages 109-138.
    4. Chen, Lihong & Xiao, Tingting & Zhou, Jia, 2023. "Do auditor changes affect the disclosure of critical audit matters? Evidence from China," Economic Modelling, Elsevier, vol. 122(C).
    5. Ding, Shujun & Jia, Chunxin & Wu, Zhenyu & Zhang, Xiaoqing, 2014. "Executive political connections and firm performance: Comparative evidence from privately-controlled and state-owned enterprises," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 153-167.
    6. Florio, Cristina, 2024. "A structured literature review of empirical research on mandatory auditor rotation," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 55(C).
    7. Zhang, Min & Xu, Haoran & Li, Xu, 2017. "The Effect of Previous Working Relationship between Rotating Partners on Mandatory Audit Partner Rotation," The International Journal of Accounting, Elsevier, vol. 52(2), pages 101-121.
    8. Rezaee, Zabihollah & Dou, Huan & Zhang, Huili, 2020. "Corporate social responsibility and earnings quality: Evidence from China," Global Finance Journal, Elsevier, vol. 45(C).
    9. Xingqiang Du & Xu Li & Xuejiao Liu & Shaojuan Lai, 2018. "Underwriter–Auditor Relationship and Pre-IPO Earnings Management: Evidence from China," Journal of Business Ethics, Springer, vol. 152(2), pages 365-392, October.
    10. Shujun Ding & Chunxin Jia & Craig Wilson & Zhenyu Wu, 2015. "Political connections and agency conflicts: the roles of owner and manager political influence on executive compensation," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 407-434, August.
    11. Xingqiang Du, 2019. "Does CEO-Auditor Dialect Sharing Impair Pre-IPO Audit Quality? Evidence from China," Journal of Business Ethics, Springer, vol. 156(3), pages 699-735, May.
    12. Anna Alon & Oksana Kim, 2022. "Protectionism through legislative layering: Implications for auditors and investors," Journal of International Business Policy, Palgrave Macmillan, vol. 5(3), pages 363-383, September.
    13. Habib, Ahsan & Jiang, Haiyan, 2015. "Corporate governance and financial reporting quality in China: A survey of recent evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 29-45.
    14. Carey, Peter & Liu, Li & Qu, Wen, 2017. "Voluntary corporate social responsibility reporting and financial statement auditing in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(3), pages 244-262.
    15. Gómez Aguilar, Nieves & Biedma López, Estíbaliz & Ruiz Barbadillo, Emiliano, 2018. "El efecto de la rotación de socio en la calidad de la auditoría," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 21(1), pages 7-18.
    16. Guangming Gong & Liang Xiao & Si Xu & Xun Gong, 2019. "Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China," Journal of Business Ethics, Springer, vol. 158(3), pages 779-806, September.
    17. Abdul Rahman Al Natour & Naim Salameh Al-Qadi & Rasmi Meqbel & Hala Zaidan & Hamzah Al-Mawali & Manaf Al-Okaily, 2023. "The Role of Privatisation in Sustaining Auditor Independence: Evidence from the Developing Markets," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    18. Gipper, Brandon & Hail, Luzi & Leuz, Christian, 2017. "On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data," Research Papers repec:ecl:stabus:3588, Stanford University, Graduate School of Business.
    19. Beatriz García Osma & Belén Gill de Albornoz Noguer & Elena De las Heras Cristobal, 2016. "Opinion shopping: Partner versus firm-level evidence," Working Papers. Serie EC 2016-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    20. Ding, Xiaoya & Guedhami, Omrane & Ni, Yang & Pittman, Jeffrey A., 2020. "Local and foreign institutional investors, information asymmetries, and state ownership," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001039. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.