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The Impact of Government Ownership and Institutions on the Reporting Behavior of Local Auditors in China

Koon Hung Chan · Kenny Z. Lin · Brossa Wong

50 citations0/0 files storedJournal of International Accounting Research

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Auditing, Earnings Management, Governance Corporate Governance and Financial Management Political Influence and Corporate Strategies

Abstract

ABSTRACT: This paper updates and extends the study of Chan et al. (2006) by investigating whether regional differences in the political and institutional environment in China have a significant impact on auditor reporting behavior. Adopting a within-country setting, which precludes cross-country confounding factors, we find that in regions with a low level of institutional development, local auditors are more likely than non-local auditors to issue standard unqualified opinions to listed companies controlled by local governments. In addition, compared with local auditors in institutionally strong regions, those in institutionally weak regions are more likely to issue unqualified opinions to these companies. We also find that companies in institutionally weak regions that switch to a local auditor after receiving a qualified opinion can succeed in opinion shopping. The results have implications for legislators and regulators in China and other transitional economies, foremost among which is that improvement in institutional structures is essential for countries striving to build a credible independent auditing profession.

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References

1981Auditor size and audit quality 2003Earnings management and investor protection: an international comparison 2000The effect of international institutional factors on properties of accounting earnings 2003Incentives versus standards: properties of accounting income in four East Asian countries 2008State ownership, the institutional environment, and auditor choice: Evidence from China 1999The impact of improved auditor independence on audit market concentration in China 2000Financial Packaging of IPO Firms in China 2004Earnings Management and Capital Resource Allocation: Evidence from China's Accounting-Based Regulation of Rights Issues

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