Mandatory Internal Control Audits, Audit Adjustments, and Financial Reporting Quality: Evidence from China
研究中国强制内部控制审计（MICA）如何通过审计调整影响财务报告质量，发现审计调整减少导致重大错报增加，但整体效果相互抵消，平均而言财务报告质量未改善。
ABSTRACT This study examines whether audit adjustments are a mechanism that links the effect of mandatory internal control audits (MICAs) on financial reporting quality. We argue that the requirement for auditors to publicly disclose internal control weaknesses exacerbated auditor-client conflicts and that this resulted in auditors being less likely to detect (and correct) misstatements in their clients' pre-audit financial statements. Consistent with this argument, we find significant reductions in audit adjustments following the staggered introduction of MICAs using data from China. We find the reductions in audit adjustments are associated with significant increases in material misstatements following the introduction of MICAs. In contrast, we find that the introduction of MICAs led to a significant reduction in material misstatements among clients that did not experience reductions in audit adjustments. Overall, the two effects offset each other, which explains why financial reporting quality did not improve, on average, following the introduction of MICAs.