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Accounting Review


client importance; audit quality; litigation; audit-reporting decision.


  1. Shimin Chen
  2. Sunny Y. J. Sun
  3. Donghui Wu




    This study examines how the legal and regulatory changes in China affect
    the relationship between client economic importance and audit quality. At the individual
    auditor level, we find that the propensity to issue modified audit opinions (MAOs) is
    negatively correlated with client importance from 1995 to 2000. However, from 2001 to
    2004, when the institutional environment became more investor-friendly, the propensity
    to issue MAOs is positively associated with client importance. These findings are corroborated
    by an analysis of regulatory sanctions. Although client importance measured
    at the office level is also negatively related to the propensity for MAOs from 1995 to
    2000 without controlling for the auditor-level client importance, this result is sensitive
    to model specification and sample composition. Our results suggest that (1) institutional
    improvements prompt auditors to prioritize the costs of compromising quality over the
    economic benefits gained from important clients; and (2) the impact of client importance
    on audit decisions appears to be different at the individual auditor and office


    Vol 85, Nomor 01, Tahun 2010


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