|Title:||Does independent audit oversight impact audit quality? : evidence from Hong Kong audit firms registered with the PCAOB|
|Subject:||Hong Kong Polytechnic University -- Dissertations|
Auditing -- China -- Hong Kong
|Department:||Faculty of Business|
|Pages:||vi, 124 pages|
|Abstract:||Accounting scandals resulting from audit failures damage the public trust on financial reporting. The effectiveness of auditors' self-regulation has been challenged and the demand for independent audit oversight has increased. The Public Company Accounting Oversight Board (PCAOB) has been the most rigorous and competent authority of auditor regulation. Most studies have focused on the PCAOB's inspection program and indicated that PCAOB inspection effectively distinguishes the audit quality of auditors and improves audit quality. The benefits not only affect US and non-US auditors' US auditees, but also spillovers to auditees in non-US auditors' home countries. The audit regulatory system in Hong Kong is self-regulatory. In view of the international change in auditor regulation for independent audit oversight, the Financial Services and Treasury Bureau of Hong Kong proposed a reform to improve the regulatory regime for Hong Kong-listed (HK-listed) entity auditors. To examine whether independent audit oversight affects the audit quality of HK-listed entity auditors, I obtain evidence from HK-listed entities of PCAOB-registered HK audit firms. Hong Kong audit firms participating in US-related audit works are required to register with the PCAOB and are therefore under its independent audit oversight. However, in Hong Kong, PCAOB inspection cannot be strictly enforced due to local restrictions. Accordingly, my examination is based on the periods before and after two events: (1) registration with the PCAOB; and (2) compliance with the PCAOB's mandatory (e.g., Form 2) filing and public disclosure rule. A difference-in-differences approach is adopted for the main research design.|
The audit quality of Hong Kong audit firms is examined using the absolute value of discretionary accruals for a sample of HK-listed entities during 2002 to 2014. I find some evidence that the quality of audited earnings for HK-listed entities of PCAOB-registered Hong Kong audit firms improves during the post-registration period. However, I find no evidence of improvement during the post-mandatory filing period. Using the difference-in-differences approach, I find that audit quality of PCAOB-registered Hong Kong audit firms is higher than that of non-PCAOB-registered Hong Kong audit firms after registering with the PCAOB, and effect on audit quality is stronger after they comply with the PCAOB's mandatory filing and public disclosure rule. Furthermore, the effect on audit quality of this mandatory filing and public disclosure requirements is more noticeable among those HK-listed entities audited by non-Big 4 auditors. Overall, my findings suggest that Hong Kong audit firms take actions to improve their quality assurance controls on auditing after registering with the PCAOB, which benefits their audits of HK-listed clients. Enactment of the annual mandatory filing and public disclosure rule improves quality as it helps PCAOB-registered Hong Kong audit firms to increase their awareness of their firms' quality assurance control procedures on auditing.
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