The Impact of Improved Auditor Independence on Audit Market Concentration in China

In an attempt to increase credibility in its capital markets, China recently adopted new auditing standards. Consistent with increased auditor independence, we "nd that the frequency of modi"ed opinions increases nine-fold subsequent to the adoption of the new standards. However, the increase in modi"ed reports is followed by a decline in audit market share among large auditors } those with the greatest propensity to issue modi"ed reports. We conjecture that this &#ight from audit quality’ results from lack of incentives to demand independent auditors. Our "ndings suggest that government regulation alone is insu$cient to create "nancial markets that foster auditor independence. ( 2000 Elsevier Science B.V. All rights reserved. JEL classixcation: G38; L15; L84; M4; O16; O53; P23