Non-audit Services, Audit Quality, and Financial Statement Restatements: Evidence from Chinese Listed Companies

Abstract

This study examines the relationship between the provision of non-audit service (NAS) and financial statement restatements (FSR) among companies in China. Concerns were raised that the provision of NAS to the same audit clients is more likely to result in a restatement of financial statements. This study also tests the direct and moderating effect of audit quality (AQ), measured as Big 4 and Local Top-10 on the relationship between the provision of NAS and the restatement of financial statements. The China localization policy among international audit firms increases the importance of exploring the impact on NAS and FSR. This study analyzes the sample of 13,676 observations for the period of 2010 to 2021 from China-listed companies. The study found that the provision of NAS was more likely to restate the financial statements, which is consistent with the belief that the provision of NAS compromises audit independence. The study finds that Big 4 audit firms reduce the potential of FSR but no evidence was derived from Local Top-10 audit firms. Nevertheless, the study also finds that the interaction of AQ, in either Big 4 or Local Top-10 audit firms did not weaken the impact of NAS on FSR. The results have aroused the thinking of companies and audit practitioners, where they need to limit their investment in NAS to remain AQ. This study’s contribution is novel to demonstrate the importance of NAS and AQ in financial statement quality management among companies listed in China.

Keywords: Non-audit services; AQ; financial statement restatements; China; fee