Optimal strategy of performance creation: Evidence from audit firms in China

Abstract

This study aims to investigate the performance determinants of audit firm in the People’s Republic of
China. Path analysis is applied to examine the association among auditor size, auditor quality, and
financial performance of the Top 100 Audit Firms in China for 2002 - 2004 and 2007. Empirical result
indicates a positive association between auditor size and auditor quality for both public and non-public
company audit market firms. Auditor size and auditor quality are directly and positively related to
performance in the public company audit market firms. However, only auditor quality directly relates to
performance positively in the non-public company audit market firms. For both public and non-public
company audit market firms, auditor quality is a mediator in the association between auditor size and
performance. Specifically, auditor quality is the key factor in the creation of performance. Auditor plays
an increasingly critical role in China. Empirical results obtained in this study not only contribute to the
related literature but also provide useful information to practitioners for decision-making.