Abstract: It is prevalent in the audit market that larger audit firms tend to have higher audit quality. This study employs the occurrence of accounting fraud as a proxy variable for audit quality to investigate whether the implementation of margin trading rules can enhance audit quality for large-scale audit firms. The research finds that the implementation of margin trading rules significantly enhances the ability of large-scale audit firms to deter accounting fraud. Furthermore, the impact of margin trading rules on the audit quality of large-scale firms is more pronounced in highly market-oriented regions, companies under poor internal governance and privately-owned companies. Mechanism tests reveal that margin trading rules enhance the ability of large-scale audit firms to prevent accounting fraud through two channels: facilitating negative information dissemination and increasing litigation risks. This study enriches theoretical perspectives on audit reputation and litigation risk theories, and practically provides experiential insights for the transformation of Chinese audit firms from “expansion” to “strengthening”.

Key words: margin trading regulations, audit size, audit quality, accounting fraud