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The consequence of audit failure on audit firms: evidence from IPO approval in China

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  • Hongqi Yuan
  • Chujun Zhang
  • Desong Kong
  • Haina Shi

Abstract

This paper examines a potential adverse consequence of audit failure. We study whether and how the audit firm’s audit failure impacts its client’s Initial Public Offering (IPO) rejection rate. Our empirical results show that the client’s IPO application rejection rates increases significantly after the audit failure. The significant increase in the IPO rejection rate holds regardless whether the audit firm is subject to regulatory sanctions on the audit failure or not. However, the sanctioned audit firm’s clients experience significantly higher IPO rejection rates than the non-sanctioned audit firm’s clients. Our further analysis reveals that the adverse outcome on clients’ IPO application varies by types of audit firm and by board of IPO listing.

Suggested Citation

  • Hongqi Yuan & Chujun Zhang & Desong Kong & Haina Shi, 2019. "The consequence of audit failure on audit firms: evidence from IPO approval in China," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 7(2), pages 245-269, April.
    • Handle: RePEc:taf:rcjaxx:v:7:y:2019:i:2:p:245-269
    DOI: 10.1080/21697213.2019.1676064
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    Cited by:

    1. Han, Chen & Wu, Chengliang & Wei, Lu, 2023. "The impact of the disclosure characteristics of the application material on the successful listing of companies on China’s Science and Technology Innovation Board," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

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