The Effect of Public Firm Audit Regulation on Private Firm Auditing : Audit-Partner-Level Evidence

Using audit-partner-level data on audit adjustments for public firms and audit-opinion data for private firms, we study whether and how public firm audit regulation impacts audit partners’ private firm auditing practices. We exploit a regulation in China that only applies to public firm auditing and is aimed at increasing transparency and rigor in audit procedures. Following the implementation of the regulation, audit partners not only make more adjustments for public firms, they also issue more modified opinions for private firms. We explore two potential mechanisms through which audit partners improve their private firm auditing: knowledge spillover and increased auditor conservatism. We find evidence consistent with both mechanisms. Collectively, our paper is the first to investigate actions at the audit partner level in studying private firm auditing outcomes and advances our understanding of the impact of public firm audit regulations on private firms