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Article
Aggregate quasi rents and auditor independence : evidence from audit firm mergers in China
Contemporary Accounting Research (2011)
  • K. Hung Chan
  • Donghui WU
Abstract

Using a sample of audit firm mergers in China’s audit market, this paper provides evidence on how auditor independence can be improved following audit firm mergers as a result of a change in aggregate quasi rents that are exposed to risk (i.e., quasi rents at stake). The setting allows us to examine directly the relationship between aggregate quasi rents at stake and independence after controlling for the confounding effects of auditor competence, audit firm brand name, and the self-selection problem that could exist in previous studies. We hypothesize that auditors become more independent in the post-merger period only if the mergers increase their aggregate quasi rents at stake. Proxying audit quality by the frequency of modified audit opinions (MAOs), we conduct separate tests for two types of mergers: one with an increase in aggregate quasi rents at stake and the other with little change in quasi rents at stake under the institutional arrangements in China. We observe more MAOs after mergers, but only for the type of mergers that increases auditors’ aggregate quasi rents at stake. Moreover, within this type of mergers, the post-merger increase in the propensity of MAOs is positively associated with the magnitude of expected change in aggregate quasi rents at stake. Our findings are consistent with the theory that auditor independence is a positive function of aggregate quasi rents at stake.

Keywords
  • Audit quality,
  • Auditor independence,
  • Quasi rents,
  • Audit firm mergers
Publication Date
Spring March, 2011
Publisher Statement
The definitive version is available http://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.2010.01046.x/abstract
Citation Information
Chan, K. H., & Wu, D. (2011). Aggregate quasi rents and auditor independence : evidence from audit firm mergers in China. Contemporary Accounting Research, 28(1), 175-213. doi: 10.1111/j.1911-3846.2010.01046.x