Type: Audit
Researcher: K. Hung Chan, Kenny Z. Lin, and Brossa Wong
K. Hung Chan is a Professor and Kenny Z. Lin is an Associate Professor, both at Lingnan University, and Brossa Wong is an Associate Professor at the Hang Seng School of Commerce, Hong Kong.
Published Online : October 2010
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.
Keywords: auditor reporting behavior; auditor switches; institutions; local auditors;
state-owned enterprises SOEs.
Data Availability: The data that we use in this study are available from public sources
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