تاثیر حاکمیت شرکتی بر انتخاب حسابرس: شواهدی از چین

As the largest and fastest growing emerging market, China is becoming more and more important to investors throughout the world. The purpose of this paper is to investigate the determinants of firms’ auditor choice in China in respect of their corporate governance mechanism. Normally firms have to take a trade-off in their auditor choice decisions, i.e., to hire high-quality auditors to signal effective audit monitoring and good corporate governance to lower their capital raising costs, or to select low-quality auditors with less effective audit monitoring in order to reap private benefits derived from weak corporate governance and less-transparent disclosure (the opaqueness gains). We develop a logit regression model to test the impact of firms’ internal corporate governance mechanism on auditor choice decisions made by IPO firms getting listed during a bear market period of 2001–2004 in China. Three variables are used to proxy for firms’ internal corporate governance mechanism, i.e., the ownership concentration, the size of the supervisory board (SB), and the duality of CEO and chairman of board of directors (BoDs). We classify all auditors in China into large auditors (Top 10) and others (non-Top 10), assuming the large auditors can provide higher quality audit services. The empirical results show that firms with larger controlling shareholders, with smaller size of SB, or in which CEO and BoDs chairman are the same person, are less likely to hire a Top 10 (high-quality) auditor. This suggests that when benefits from lowering capital raising costs are trivial, firms with weaker internal corporate governance mechanism are inclined to choose a low-quality auditor so as to capture and sustain their opaqueness gains. On the other hand, with improvement of corporate governance, firms should be more likely to appoint high-quality auditors.

The purpose of this study is to investigate the association between firms’ internal corporate governance mechanism and their auditor choice decisions in China. Auditor choice, i.e., client–auditor alignment, can be viewed as the minimum cost match between client needs (the demand side) and auditor services (the supply side) in a certain auditing environment (Datar, Feltham, & Hughes, 1991). Studies on auditor choice to date have been conducted predominantly in the U.S. (Chow & Rice, 1982; Copley & Douthett, 2002; Copley, Gaver, & Gaver, 1995; DeAngelo, 1982; Geiger, Raghunandan, & Rama, 1998; Hogon, 1997; Hudaib & Cooke, 2005; Johnson & Lys, 1990; Krishnan, 1994; Lee, Mande, & Ortman, 2004; Pittman & Fortin, 2004), with occasional studies in countries such as Australia (Beatty, 1989 and Craswell, 1988), New Zealand (Firth, 1999; Firth & Smith, 1992) and the UK (Beattie & Fearnley, 1995; Chaney, Jeter, & Shivakumar, 2004), where the auditing environments are relatively similar. One reason why audit markets in these countries have been studied extensively relates to the developed capital markets in these countries. However, there are few empirical studies that examine auditor choice decisions in the emerging economies; even the auditor choice issue has a critical impact on the credibility of corporate financial reporting and the operation of capital market. Emerging economies have less developed equity markets and very different auditing environment than the developed ones (Fan & Wong, 2005; Woodward, 1997). This study extends the auditor choice literature further from the developed capital markets to the less developed Chinese market. Shortly after the founding of the People's Republic of China in 1949, the auditing profession in China became non-existent. Independent audits were virtually non-existent under the planned economy before the 1980s, as the State both owned and ran all enterprises directly. Mushrooming Sino-foreign joint ventures resulting from China's open-door policy adopted in the early 1980s, however, led to the re-emergence of independent auditing in the country. Due to non-state owned interests in the joint ventures, demands emerged for verification of capital contributions and audits of annual financial statements and income tax returns by non-government employed professionals, which brought about the reappearance of Chinese certified public accountants (Xiao, Zhang, & Xie, 2000).1 Independent audits are thus called for to alleviate the agency problems in Chinese enterprises. The shift of ownership rights from the state to private and institutional investors as a result of increasing diversification in the Chinese economy after the resurgence of stock companies and capital market at the turn of 1990s has further promoted the monitoring role of independent audits. The establishment of the two stock exchanges in Shanghai and Shenzhen in 1990 and 1991, respectively, and the promulgation of new accounting and auditing standards have played an important role in this process. The China Securities Regulatory Commission (CSRC) requires that all listed firms have their annual reports audited by the Chinese certified public accountants (Chinese CPAs). The monitoring of both public and private enterprises by independent auditors has gradually been employed by the government as an important mechanism in transforming the Chinese economy from one directed by the “visible hand” of centralized planning to the one guided by the “invisible hand” of market forces. By the end of 2000, there were about 1000 auditing firms operating in China, most of which were initially set up or sponsored by government agencies (the public finance, state auditing or taxation authorities) or social institutions such as universities or professional associations. Under this kind of sponsorship arrangement, the independence and quality of audit services were challenged by various user groups. Thus the Chinese government introduced a reform in the mid 1990s to delink all auditing firms from their original sponsors, both financially and personally. The reform was completed by 1999 with all auditing firms reorganized as professional partnerships in the country. The government further encouraged auditing firms to merge across different provinces or geographical regions in order to reduce the dependency of auditing firms on their original sponsors (the local governmental authorities in particular). At the same time, new accounting and auditing standards that are modeled after the international norms have been introduced and enforced. As a result, the quality and independence of Chinese auditors have been substantially improved, which help to promote a more effective functioning of auditing services in the country. In attesting to the credibility of accounting information provided by management, independent audits play an external monitoring role on behalf of the owners/shareholders and are an essential component of the corporate governance mosaic (Abdel-khalik, 2002; Ashbaugh & Warfield, 2003; Cohen, Krishnamoorthy, & Wright, 2002). Nonetheless the utility of audit services depends upon the quality of auditing. Several prior studies documented that firms with high agency costs are inclined to choose a high-quality auditor to improve their corporate governance and alleviate the potential agency problems (Fan & Wong, 2005; Hay & Davis, 2004). Relatively speaking, low-quality auditors may not be able to exercise an effective monitoring of clients’ financial reporting process (Claessens, Djankov, Fan, & Lang, 2002; Mayhew, Schatzberg, & Sevcik, 2003). Thus the quality of independent audits will directly affect firms’ corporate governance and operations (Cohen et al., 2002). There is always a trade-off between hiring a high-quality auditor to improve corporate governance and hiring a low-quality auditor to sustain the opaqueness gains from relatively weak corporate governance mechanism (e.g., benefits through earnings management and “tunneling” behaviors for the controlling owners of the listed firms). Thus auditor choice is an issue with significant theoretical and practical implications (Fan & Wong, 2002; Parker, Peters, & Turetsky, 2005). The audit market in China presents an interesting arena for the study of auditor choice. Unlike those in developed economies, the Chinese accounting and auditing profession is not only regulated but also administered by government agencies. The government exercises control by setting the professional standards and by directly monitoring the operations of auditing firms. It is therefore of great interest to examine whether independent audits are value relevant in a market where stringent government control often prevails over market mechanisms. In addition, the bear market in China during 2001–2004, when the incentives for raising capital in the stock market were low, provides a good opportunity to study the association between internal corporate governance mechanism and firms’ auditor choice decisions.2 We examined the relationship between firms’ internal corporate governance mechanisms and their auditor choices for the Chinese initial public offering (IPO) firms during this testing period. The empirical results show that firms with larger controlling owners (holding a high proportion of equity), with smaller the supervisory boards (SBs), or in which the CEO and the chairman of the board of directors (BoDs) are the same person, are less likely to hire a high-quality (large) auditor in China. This result suggests that when benefits from lowering capital raising costs are trivial, firms with weak corporate governance mechanisms would decline to choose a high-quality auditor so as to capture and sustain their opaqueness gains. The evidence, in general, suggests that large auditors have been able to product-differentiate themselves in the Chinese equity market. The quality of independent audits and corporate disclosure is identified as an important factor for the Chinese stock market, in which investor confidence has to be bolstered in order to mobilize social resources to facilitate China's transition towards a market-oriented economy. Our findings on the determinants of auditor choice in the Chinese context will shed light on how to improve firms’ corporate governance and audit monitoring to enhance the credibility of corporate reporting and to promote smooth development of capital market in China. Our study also has implications for international investors. As CSRC has recently granted licenses to Qualified Foreign Institutional Investors (QFII), such as Morgan Stanley, Goldman Sachs, and Citibank, to participate directly in China's domestic stock market, the findings suggest that international investors need to be aware of the structural arrangement of corporate governance of the listed firms and the effectiveness of audit monitoring in China. The paper is organized as follows: Section 2 reviews relevant prior studies in the literature. Hypotheses are developed to examine the association between internal corporate governance mechanisms and auditor choice decisions in Section 3. Section 4 develops a model to test the hypotheses. Empirical results are presented and discussed in Section 5, followed by the sensitivity tests in Section 6. Section 7 concludes the paper.

The purpose of this study is to investigate the association between firms’ internal corporate governance mechanisms and their auditor choice decisions in the Chinese context. Three variables are used to proxy for firms’ internal corporate governance mechanism, i.e., the shareholding proportion of the controlling owner, the size of the SB, and the duality of CEO and BoD chairman positions. We categorize Chinese auditors into two groups, Top 10 (high-quality) and non-Top 10, according to the ranking of their annual revenues as publicized by CICPA. Through logit regression, we identify the impact of the three internal corporate governance variables on the audit choice decisions undertaken by the IPO firms being listed in China during 2001–2004. The empirical results support all three hypotheses used to test the determinants of the firms’ auditor choice decisions. Firms with larger controlling owners, with smaller SB size, and in which the positions of CEO and BoD chairman are held by the same person, are less likely to hire high-quality (Top 10) auditors. The findings may suggest that, when stocks or equity rights reissuing is unlikely, listed firms with large controlling owners may be less enthusiastic in improving corporate governance. Capitalization of the opaqueness gains derived from weak corporate governance mechanisms then dominate firms’ auditor choice decisions. The listed firms may be inclined to choose auditors of low quality to maintain their opaqueness gains. Firms with weaker internal corporate governance mechanism are more likely to choose a low-quality auditor since they have more opaqueness gains to protect. Thus the effectiveness of audit monitoring is positively affected by the quality of firms’ corporate governance practices in China. The study findings may generate implications for the stakeholders of the Chinese listed firms, especially the investors and market regulators. It is not a good practice for listed firms with weak internal corporate governance mechanisms to choose low-quality auditors. In so doing, the controlling shareholders of the listed firms can easily capture private benefits from exploiting small shareholders. To bolster the confidence of the market participants, the Chinese government should promote the reform of corporate governance of the listed firms, enforce an effective functioning of the SB as well as independent non-executive directors or an auditing committee system to further improve firms’ internal and external monitoring mechanisms, and enhance the transparency and information credibility of the listed firms. At the same time, the Chinese market regulators must enhance the surveillance of the behaviors of the controlling shareholders and the quality of corporate reporting and auditing processes to curb listed firms from seizing self-benefits or the opaqueness gains by avoiding high-quality audit monitoring, and to protect the interest of all investors. As a result, the auditing profession and the stock market should be able to develop smoothly in China. It is worthwhile to point out that the stock market and auditing environment in China have some distinct features compared to most developed countries. For instance, there is a dominant portion of non-tradable state-owned equity shares for Chinese listed firms and the government exercises substantial control over the operations of the listed firms. In addition, the auditing profession is directly regulated by the government and the utility of auditing services may not be fully realized in a relatively less efficient capital market in China. Thus one should be careful when interpreting the results of this study, in particular, the effects of different environmental factors should be taken into account when comparing auditing practices in China to the developed countries. Nonetheless, in line with the continuing progress of the economic reforms and business restructuring, the Chinese accounting and auditing practices have moved towards internationalization rapidly in recent years. The Chinese experience involving auditor choice decisions should be relevant to the development of the independent audit function in other developing countries. There are some limitations in this study. First, more rigorous results may be derived from more sophisticated simultaneous equation methods for the auditor choice tests. Prior studies (Copley & Douthett, 2002; Feltham et al., 1991) suggest that auditor choice research should consider both the demand and the supply sides of audit services. Simultaneous equation methods could be used to control both the demand and the supply effects of audit services. However, as many Chinese listed firms do not disclose the audit fee information (a key variable to proxy for the supply effect in the audit market), controlling for the supply side effects in the regression is difficult at present. Second, the size of the SB may not be a good proxy for internal corporate governance mechanisms since many SB members are from inside the firms. The testing result may be more convincing if we include the variables about the numbers and expertise of independent non-executive directors and the characteristics of audit committee (i.e., its composition, member expertise, and activities) in the regression. Although data about the more recent practices of independent non-executive directors and audit committee characteristics are not available for our testing period, they could be incorporated into regression models with extended testing period in future studies. In addition, we used the size of auditing firms to differentiate between high- or low-quality auditors. There are other variables employed as alternative indicators of auditor quality in the literature, which could also be used to examine the determinants of auditor choice decisions. Finally, although government agencies (including parent SOEs) have dominant shares of equity in most Chinese listed firms, some non-government controlled or privately owned firms have gotten listed in the market in recent years. The demands or expectations of these firms for the quality of auditing may differ from the listed firms with dominant state-owned equity shares, which should merit further study in the future.