Political institution and audit quality: Evidence from China

In the course of far-reaching reforms of economy in China, the issue of how to keep the proper functioning of the capital market is the major concern. As external monitors, auditors play a key role in communicating relevant information to outside users through providing reasonable assurance that financial reports are free from material misstatement (DeAngleo, 1981; Francis and Krishnan, 1999). Their reporting behavior and association with firms’ performance have been studied extensively. Moreover, Chinese institutional environment is critical in analysing auditor behavior as the Chinese government dominates key resource allocations and exerts significant influence on the auditing market. Therefore, the main purpose of this thesis is to identify the effectiveness of the capital market and independence of auditors in China. First, this thesis examines how political turnover influences auditor reporting behavior and whether this influence varies among auditors. Then this thesis investigates auditors’ responses taking advantage of the green finance policies (GFPs) as a shock to capital allocation. Finally, this thesis identifies the effects of the abuse of political power on auditor reporting behavior.