臺大管理論叢 NTU Management Review VOL.30 NO.2

Do Government Initiatives and Reasons for Auditor-Client Realignment Influence Audit Fees and Audit Quality? Evidence from China 212 1. Introduction The accounting profession has been positioned as one of the critical pillars to develop China’s capital markets. 1 To enforce this mandate, the Chinese Institute of Certified Public Accountants (CICPA), with support from China’s Ministry of Finance (MOF), issued a professional opinion – 《關於推動會計師事務所做大做強的意見》 ( Guanyu tuidong kuaijishi shiwusuo zuoda zuoqiang de yijian ) (referred to as “the government initiative” hereafter) in May 2007. The purpose of the initiative is to “expand” （做大） and “strengthen” （做強） professional services provided by domestic accounting firms in China, so that they can be competitive with and serve as an alternative to the international Big-4 auditors. If this initiative works as envisaged, it will help to reshape the professional environment domestically and create a new wave of auditor-client realignments. Through realignments between auditors and clients, corporate executives and management of accounting firms will likely open new rounds of negotiations over professional fees. One result of these negotiations is to revamp the audit market and overhaul the audit fee structure in China. Moreover, these realignments could potentially improve the quality of audit services provided by accounting firms owned and operated by Chinese nationals. The purpose of this study is to explore whether the government initiative to expand and strengthen accounting firm practices domestically and the reasons for auditor-client realignment jointly affect audit fees and audit quality. To investigate this research inquiry, we must first find out whether auditor-client realignments have occurred and been documented. It is known that the Securities and Exchange Commission (SEC) has required its registrants to formally report auditor-client realignments in details since 1971. 2 Similar to their U.S. counterparts, China’s regulators also require publicly listed companies in China to disclose auditor-client realignments as significant events in their 1 As part of the effort to strengthen the domestic accounting profession, the Shanghai National Accounting Institute, along with other two institutes, were established in September 2000 as a public service institution affiliated with the Ministry of Finance of China under the strong support of former Chinese Premier Zhu Rongji . 2 The SEC began requiring registrants in 1971 to disclose details of auditor-client realignment decisions in a timely manner on their Form 8-K, Item 4, filings. Required 8-K disclosures have evolved over time by providing expanded information regarding auditor-client realignments within the following categories: reportable events, other required disclosures, and voluntary disclosures. In particular, the SEC encourages registrants to voluntarily disclose any additional reasons for audit realignments, including (1) client-service related reasons, (2) fee disputes, and (3) verifiable or previously disclosed reasons.