Determinants and consequences of voluntary switches to Chinese auditors in Hong Kong. Issue 3 (December 2019)

• Record Type: Journal Article
• Authors: Liu, Zhenfeng; Lin, Stephen
• Is Part Of: Journal of contemporary accounting & economics. Volume 15:Issue 3(2019)
• Publication Date: 2019-12
• Subjects: M40 -- M42 -- M48; Auditor switches -- Audit quality -- Market reaction; Accounting -- Periodicals; Accounting -- Research -- Periodicals; Accounting -- Periodicals; Accounting; Accounting -- Research; Periodicals; 657.05
• DOI: 10.1016/j.jcae.2019.100158
• Languages: English
• ISSNs: 1815-5669

Abstract

Abstract: Hong Kong market regulators have permitted 12 large Chinese accounting firms to audit the financial statements of Chinese firms that cross list in Hong Kong (i.e., H-share firms) since 2010. This paper examines the characteristics of H-share firms that voluntarily replaced their Hong Kong (HK) auditors with Chinese auditors, and the market reaction to auditor switches following this policy. We find that 38 out of 147 H-share firms voluntarily switched to Chinese auditors during 2011–2013. Switching firms are larger in size and are less likely to use Big4; they also have less need for external financing, a longer cross listing history, and a lower percentage of foreign revenue. We also find that investors negatively react to the auditor switches from HK non-Big4 to China non-Big4, but do not react to the auditor switches from HK Big4 to China Big4. This suggests that investors perceived lower audit quality for China non-Big4.