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 214 find out whether the government initiative and the reasons for realignments jointly affect audit fees. Third and finally, auditor-client realignment provides an opportunity for corporate executives to look for accounting professionals who possess the expertise necessary to address their needs. On the other hand, auditor-client realignment offers a scenario in which accounting firms can recruit clients that fit into their business strategies and broaden their client portfolios. Moreover, as DeAngelo (1981) orchestrates and Harford (2005) echoes, audit quality probably will improve when accounting firm size expands. With support of the government initiative to develop local accounting firms, the sizes of the Chinese Top 10, which are second-tier auditors in the country, presumably will increase. By expanding accounting firms’ operations, it is expected that audit quality will improve as well. To detect this potential effect, we examine whether the government initiative to expand domestic accounting firms and strengthen their practices and the auditor-client realignment jointly influence audit quality. To look into these empirical questions, we first group the observations by state ownership: SOEs and NSOEs ( STATE ). We further divide the data collected into three groups according to the reasons behind auditor-client realignment decisions: client-related ( REASON_CLIENT ), CPA firm-related ( REASON_CPA ), and government-related ( REASON_GOV ). To test the effects of the government initiative on audit fees and audit quality, we incorporate a dummy variable, POST_2007 , into the regression models. Three dependent variables are analyzed in this study: disclosure of auditor-client realignment decisions ( REASON_DISCLOSURE ), audit fees ( LNAF ), and audit quality ( MAO ). To detect why certain clients decide to reveal their reasons to realign with auditors while others choose not to do so, we adopt the probit model developed by Sankaraguruswamy and Whisenant (2004). Next, we follow the regression model developed by Huang, Raghunandan, Huang, and Chiou (2015) to examine the joint effect of the government initiative and the reasons for auditor-client realignment on audit fees. Finally, we employ the model developed by Huang et al. (2015) to investigate whether the government initiative and the reasons for auditor-client realignment jointly affect audit quality. This study uses Chinese publicly listed firms as the research setting. Following the sample selection processes, we collect and analyze 1,340 firm-year observations from 2002 to 2014. The empirical evidence obtained from our analyses shows that state ownership, SOEs versus NSOEs, and the government initiative, pre-2007 versus post- 2007, jointly affect managerial decisions to disclose the reasons for auditor-client