An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Heibatollah Sami
Lehigh University

Zhongxia (Shelly) Ye
Kennesaw State University

Abstract: Zhongtianqin, the largest Chinese auditor, collapsed in 2001 due 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 due to audit failure. However, civil lawsuits against auditors have not succeeded. 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 value and insurance value. Also, the whole market reacted to the scandal. Moreover, we show that investors differentiate audit quality in the stock valuation. Finally, companies audited by international auditors suffered less value losses. This study adds to the worldwide literature of auditor failure.

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