The Risk-Revealing Effect of Audit Quality on Corporate Financial Risks -An Empirical Test Based on Panel Data of A-Share Listed Companies

DOI: https://doi.org/10.62517/jse.202611303

Author(s)

Miaoke He

Affiliation(s)

Northwest University of Political Science and Law, Xi’an, Shaanxi, China

Abstract

Against the backdrop of the deep integration of the digital economy and regulatory technology, audit governance has become a core mechanism for corporate risk prevention and control. However, the complexity of financial risks faced by A-share listed companies stands in stark contrast to the limitations of traditional audit models. This study focuses on audit quality and, based on panel data from A-share listed companies from 2018 to 2023 (all data sourced from the CSMAR database), investigates its impact on corporate financial risks and the underlying mechanisms. Using the entropy method, we construct a comprehensive audit quality index (encompassing three dimensions: audit assurance quality-i.e., audit opinion; firm reputation and scale-i.e., whether the firm is one of the Big Four or among the top ten domestic accounting firms; and audit input level-i.e., audit fees) to empirically test main effects, mediating effects, and heterogeneity effects. The results indicate that audit quality plays a significant risk-disclosure role and is significantly negatively correlated with firms’ book financial risk indicators; earnings management mediates this relationship, with audit quality revealing firms’ true financial risks by curbing earnings management; this risk-disclosure effect exhibits significant heterogeneity, being more pronounced in non-state-owned enterprises and highly marketized regions. This study enriches research on the economic consequences of audit quality and provides references for corporate risk prevention and control as well as regulatory policy formulation.

Keywords

Audit Quality; Corporate Financial Risk; Risk Disclosure Effect; Earnings Management

References

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