The complementarity of public enforcement mechanisms: evidence from random audit inspections and IPO reviews
研究中国证监会随机审计检查与交易所IPO审核的互补性，发现检查后IPO审核强度增加，尤其当审计机构被查出问题时，且对声誉较低的机构影响更大。
Purpose This study examines the complementarity of two public enforcement mechanisms, the random audit inspection conducted by the CSRC and the initial public offering (IPO) review process for audit firms’ clients by the stock exchanges. Design/methodology/approach Our initial sample includes all firms listed on the STAR market from its establishment in July 2019 through December 2022. We manually collect random audit inspection data from the CSRC ROs' official website and the issuance of comment letters during the IPO process from SSE’s official website. We obtain other data (e.g. firms’ post-IPO performance data) from the China Stock Market and Accounting Research database (CSMAR). Findings Utilizing a hand-collected dataset of random audit inspection and IPO review data, we find that IPO review intensity significantly increases for clients of inspected audit firms, especially when the audit firms are found to have issues during the random audit inspection. This effect is stronger when the reputations of the audit firms or underwriters are lower and external oversight is strengthened. Furthermore, clients of inspected auditors face more inquiries requiring auditors' independent opinions, longer reply intervals and IPO delays. Following random audit inspection, there is a marked tendency among IPO firms to update their prospectuses. Due to the deterrence effect, we find that random inspections influence IPO approval rates and post-IPO performance when audit firms are penalized. Practical implications Firstly, despite the improvement of audit quality after the random inspection, our findings show the causal effect of random audit inspection on IPO review intensity, which can serve as evidence of regulatory complementarity. Secondly, our paper demonstrates that regulators are concerned about auditor regulation and the consequent higher public pressure in the IPO review process, which further highlights the gatekeeper role audit firms should play in information disclosure quality and the importance of public opinion in the IPO review process. Originality/value Firstly, our paper contributes to the extensive literature on the IPO review process by identifying the audit regulation as a significant regulatory antecedent. This study is one of the few that directly examines how regulatory activities within regulatory agencies affect exchange-led listing reviews. Secondly, we diverge from prior studies by introducing the random audit inspection to identify the causal effect and examining the real economic consequences of securities regulation.