Auditor Type and Audit Quality in China: The Role of State Ownership

Abstract

This study examines the resource-based view (RBV) against the institution-based view (IBV) using China's state-engineered audit market, where a decade of policy-driven consolidation created a Top 6 group of local audit firms intended to rival the Big 4. The RBV suggests that the Big 4's accumulated, firm-specific resources should sustain a quality advantage regardless of policy support. The IBV suggests that state-conferred institutional capital, reinforced by state ownership (SOE) on the client side, should narrow or eliminate that advantage. Using a sample of 4,525 listed companies and 17,047 firm-year observations covering 2019–2023, audit quality is proxied by audit fees, discretionary accruals, modified audit opinions, and financial solvency (the Altman Z-score), with a Heckman two-stage model addressing auditor-choice selection bias. Because Hausman tests reject random effects in favour of fixed effects for all four proxies (p < 0.01), the models are estimated with firm and year fixed effects and standard errors clustered at the firm level; variance inflation factors remain below 3.1 throughout, and the current ratio and leverage are excluded from the financial-solvency equations because both are direct arithmetic components of the Altman Z-score used to construct that measure. Under this firm-level test, only the Big 4's audit-fee premium proves robust, persisting after the Heckman correction and consistent with the RBV. The Big 4's advantage does not extend to the other three proxies once time-invariant firm heterogeneity is controlled for: discretionary accruals are statistically indistinguishable across auditor tiers, the Top 6 rather than the Big 4 are significantly associated with a higher incidence of modified opinions, and the Top 6 show only a marginal association with stronger financial solvency (p < 0.10) with no corresponding Big 4 effect. State ownership does not significantly moderate the relationship between auditor type and any of the four audit-quality proxies once firm heterogeneity is controlled for. These findings indicate that the Big 4's resource-based advantage in China is concentrated in fee-setting rather than distributed evenly across audit-quality dimensions, and that associations reported under less conservative panel specifications, including an apparent state-ownership link to financial solvency, do not survive controlling for firm-level heterogeneity. The focus on Chinese listed firms limits generalizability to other emerging markets, though the RBV-IBV framework itself is transportable to settings where governments have sponsored domestic professional-service champions. Policy aimed at closing audit quality gaps through consolidation or institutional protection should be paired with direct investment in the technical and human-capital resources that continue to distinguish the Big 4 on the one dimension of audit quality, pricing power, where their advantage remains demonstrable.