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 250 observation is obtained from a state-owned enterprise and 0 otherwise. CMI is the credit market index, derived by Wang et al. (2008). GDI is the government decentralization index, derived by Wang et al. (2008). LEI is legal environment index, derived by Wang et al. (2008). ISSUEB is coded 1 if the client issues B shares and 0 otherwise. ISSUEH is coded 1 if the client issues H shares and 0 otherwise. EXCHANGE is coded 1 if the firm is listed in the Shanghai Stock Exchange and 0 otherwise. 6. Summary, Policy Implications, and Conclusions This study examines the following research questions empirically. First, do state ownership and the government initiative to expand and strengthen Chinese accounting firm practices jointly affect clients’ willingness to reveal their reasons for switching auditors? Second, do client realignment reasons and the Chinese government initiative jointly affect the fees paid to auditors? Finally, do client realignment reasons and the Chinese government initiative jointly affect the level of audit quality? To address these questions, our primary interest rests on the interactive effect between client realignment reasons and the government initiative. According to the empirical results reported in this study, we find that state ownership and the initiative jointly influence corporate executives’ decisions to disclose the reasons to realign with auditors. Moreover, client- driven realignment reasons and the initiative jointly and significantly reduce the audit fees paid by clients to CPA firms. Finally, audit quality is likely to deteriorate after the issuance of the government initiative when auditor-client realignments are driven by CPA firm- related reasons. Based on the empirical findings reported in this study, several policy implications can be drawn to regulatory agencies, professional organizations, and those in charge of accounting firms. For regulatory agencies, ensuring high audit quality is crucial to maintain order in capital markets and to achieve efficient resource allocation in society. Since the evidence demonstrated by this study indicates that after the issuance of the government initiative, audit fees fell, it is plausible to infer that such an initiative may lead to auditor lowballing because it opened up a window of opportunity for CPA firms to compete for clients. Under this scenario, the government initiative to expand and strength domestic accounting firm practices may have had unintended and unforeseen consequences, including the creation of severer competition among accounting firms in China. To mitigate the potential drawbacks, certain restrictions or additional monitoring mechanisms should be put in place by regulators to ensure that shareholders’ interests are protected strongly, and that the order of capital markets can be properly maintained.