بررسی های نظارتی شرکای حسابرسی و بهبود کیفیت حسابرسی Regulatory investigations of audit partners and audit quality improvement

1. Introduction Regulators play a critical role in monitoring auditors. Since 2000, the China Securities Regulatory Commission (CSRC) has enhanced its monitoring of auditors, and thus auditors are being investigated and sanctioned in increasing numbers (Fang, 2011). The existing literature on regulatory monitoring often focuses on regulatory sanctions but largely ignores regulatory investigations, so Wu and Zhang (2014) call for more research on regulatory investigations.1 In particular, prior studies examine audit quality changes around CSRC sanctions and provide mixed evidence on the effect of regulatory monitoring of audit quality (e.g. Fang, 2011; Firth, Mo, & Wong, 2014; Liu, 2013; Wang, Li, Su, & Tang, 2011; Wu, 2008). It is worth noting that regulators often investigate auditors long before the sanctions are imposed, and the lag between a CSRC investigation and the sanction that follows is often more than two years. If auditors improve their audit quality immediately after the investigations, it is possible that the auditors will have already improved audit quality by the timethe CSRC sanctions are imposed. Consequently, audit quality may not significantly change after CSRC sanctions, which may explain why prior studies find a weak effect of CSRC sanctions on audit quality. In other words, the effect of the CSRC’s monitoring of audit quality can be underestimated if the audit quality changes around CSRC investigations are overlooked. In addition, Lennox and Wu (2016) emphasise that the understanding of audit partner behaviour is limited and request more research on audit partners. In response to these calls for research from Wu and Zhang (2014) and Lennox and Wu (2016), our study examines whether audit partners provide assurance of better quality after they are investigated by the CSRC. We predict that audit partners will improve their assurance quality after CSRC investigations. Wu and Zhang (2014) find that the stock market reacts more negatively to CSRC investigation announcements than to CSRC sanction announcements. Their finding suggests that, compared with sanction announcements, investigation announcements are more informative for investors and can attract more attention from capital market participants. Moreover, rational learning theory suggests that agents learn from experience and adjust their future behaviour (Andenaes, 1966; Lennox & Li, 2014; Muth, 1961; Townsend, 1978). Audit partners being investigated by the CSRC can rationally revise their assessment of the probability of being investigated upward, and thus are likely to improve their audit quality to avoid future investigations. In addition, a CSRC investigation can cause the involved partners2 to realise that their audit quality is poor and that they need to take action to improve. Therefore, we posit that CSRC investigations can deter the involved audit partners from providing low-quality attestation.