Auditor Reverse-Merger Expertise: Evidence from Chinese Reverse-Merger Companies

Abstract

SUMMARY This study investigates if hiring auditors with Chinese reverse-merger expertise affected 182 Chinese companies that executed reverse mergers with U.S. shell companies from 2003 to 2011 to become U.S. publicly traded companies (Chinese reverse-merger companies, or CRM companies). We find that CRM companies that employ CRM-expert auditors pay higher audit fee premiums, and are more likely to up-list to national exchanges, when they are compared to CRM companies with non-CRM-expert auditors. Additional analyses suggest that clients of CRM experts also are more likely to file annual financial reports on time, but CRM-expert auditors are not associated with fewer misstatements in financial reporting or continued trading on national exchanges. This suggests that CRM-specialist auditors help clients navigate regulatory requirements for up-listing, but they do not achieve improved financial reporting quality.