A New Wave of Audit Partners: Evidence from the Chinese Localization Rule

• In Event: Auditor Labor Markets I

Abstract

We examine a unique regulation that accelerated the localization of the Big 4 operations in China, requiring these firms to have at least 80 percent locally licensed audit partners. This shift required a reorganization of the firms’ human capital, which could have direct and indirect consequences for their partnerships’ structure and audit quality. We examine fourteen years around the implementation of the regulation and rely on a difference-in-differences research design, comparing several outcomes between Big 4 and other top-10 local audit firms. We demonstrate that the Big 4 met the requirements by promoting local talent, increasing the number of incoming partners occupying junior roles, and diluting each partner’s share of the total firm’s clients. However, we do not find evidence that the regulation had an incremental effect on audit quality. Our findings suggest that the regulation achieved its intended objectives, primarily developing local human capital, without impairing audit quality.

Authors

• Yini Wang, University of Miami

• Pietro Andrea Bianchi, Florida International University

• Miguel A Minutti-Meza, University of Miami

• Lin Liao, Southwestern University of Finance & Economics