In an attempt to increase credibility in its capital markets, China recently adopted new auditing standards. Consistent with increased auditor independence, we find that the frequency of modified opinions increases nine-fold subsequent to the adoption of the new standards. However, the increase in modified reports is followed by a decline in audit market share among large auditors – those with the greatest propensity to issue modified reports. We conjecture that this `flight from audit quality’ results from lack of incentives to demand independent auditors. Our findings suggest that government regulation alone is insufficient to create financial markets that foster auditor independence.