Yi-Pei Liu1 and Yu-Shu Cheng2*
Auditing has been identified as an area of immense importance for the development of China's stock market. Auditing not only provides reliable information for users, but, more importantly, it must coordinate the potential interests among the public, central and local state, and the nation. This study investigates the association between the auditing value and earnings management risk (EMR) induced by security regulation. It is hypothesized that, from the perspective of risk premiums, the auditing value increases as the EMR increase. Using a sample of 4,594 Chinese listed firms during 2001 to 2006, we find that auditing value is positively associated with EMR. We also find that different types of security regulation affect the auditing value. The results are robust to different model specifications and alternatives sample. Apart from providing some new evidence in the important area of auditing value, we also reveal interesting implications for auditing profession, regulators, entrepreneurs, and investors.
Key words: Earnings management, auditing value, security regulation, risk premium.