Title: Auditor failure and market reactions: evidence from China

Authors: Sharad C. Asthana, Heibatollah Sami, Zhongxia (Shelly) Ye

Addresses: Department of Accounting, College of Business, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249, USA. ' Department of Accounting, College of Business and Economics, Lehigh University, Bethlehem, PA 18015-3117, USA. ' School of Accountancy, Coles College of Business, Kennesaw State University, 1000 Chastain Rd. Kennesaw, GA 30144-5591, USA

Abstract: Zhongtianqin, the largest Chinese auditor in 2000, collapsed in 2001 owing to its audit failure. This study examines how the market reacted to the audit scandal in the Chinese institutional setting. Chinese investors are entitled to recover their investment losses from auditors owing to audit failure. However, civil lawsuits against auditors have not succeeded in the past. Therefore, Chinese auditors do not face the real threat of shareholder litigation. They only have the threat of costly governmental penalties for violating the regulations. Even so, we demonstrate that Chinese audit still contains both assurance and insurance values. Also, the entire market reacted to the scandal. Moreover, we show that investors differentiate audit quality in stock valuation. Finally, companies audited by international auditors suffered less value losses. This study adds to the worldwide literature on auditor failure.

Keywords: assurance effect; audit quality; auditor failure; China; domestic auditors; international auditors; government penalties; insurance effect; market reactions; stock value.

DOI: 10.1504/IJAAPE.2009.027880

International Journal of Accounting, Auditing and Performance Evaluation, 2009 Vol.5 No.4, pp.408 - 441

Published online: 13 Aug 2009 *

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