Did the SEC administrative proceedings against Chinese auditors affect audit quality?

On December 3, 2012, the SEC instituted administrative proceedings against five Chinese audit firms, including the Big Four accounting firms' Chinese affiliates, for their refusal to provide the SEC with audit workpapers and other audit documents of ten US-listed Chinese clients. The SEC proceedings led to an enforcement cooperation agreement between the US and Chinese regulators, making it possible for the SEC and PCAOB to access Chinese auditors' documents. This study examines whether the SEC proceedings had any impact on the audit quality of auditors subjected to the proceedings. We find that both signed and absolute abnormal accruals of Chinese Big Four auditors' clients did not decrease from the pre- to post- proceedings period. The difference-in-differences test indicates that a decline in the frequency of small positive earnings was not driven by the proceedings. We also find no significant changes in the occurrence of financial restatements in amended annual reports. Although the SEC proceedings together with the US -China agreement signified an enhanced enforcement of cross -border securities regulation, our findings suggest that the proceedings had not improved the audit quality of PCAOB-registered Chinese auditors. (C) 2019 Elsevier Inc. All rights reserved.