Regulatory investigations of audit partners and audit quality improvement

Abstract

Prior studies of the effect of regulatory monitoring on audit quality focus on regulatory sanctions but ignore regulatory investigations. We hand-collected data on the China Securities Regulatory Commission (CSRC) investigations announced during 2001–2015 to examine the impact of CSRC investigations on the audit quality of the targeted partners. We find that after the audit partners are investigated by the CSRC, their clients exhibit a lower absolute value of discretionary accruals and the partners are more likely to issue modified audit opinions. Our results suggest that CSRC investigations lead to improvement in the audit quality of the partners involved in the investigations. In contrast, CSRC sanctions have a relatively weak effect on the audit quality of the involved partners. Overall, our study provides evidence that CSRC monitoring helps to improve the audit quality of audit partners, and the effect manifests around CSRC investigations.