Is there an association between accounting firm ranks and audit quality? An examination of the top 100 accounting firms in China

Abstract

Using 15,354 firm‐year observations from Chinese listed companies from 2003 to 2013, we examine the association between accounting firm ranks, disclosed by the Chinese Institute of Certified Public Accountants (CICPA), and audit quality. The results show that clients audited by higher ranked accounting firms report lower discretionary accruals and are more likely to receive modified audit opinions. Additionally, accounting firm ranks are found to better capture audit quality after recent modifications by the CICPA to include nonrevenue metrics. Finally, we find that clients are more likely to replace downgraded accounting firms and pay higher audit fees when switching to a higher ranked firm. Our results suggest that accounting firm ranks capture audit quality, have economic implications, and would serve as an audit quality indicator. This study should be useful to global accounting regulators, practitioners, and academics concerned with auditor quality in China and who seek to develop audit quality indicators.