Critique
Critique Research of < The Impact of Government Ownership and Institutions on the Reporting Behavior of Local Auditors in China >
By Chongxiao (Claire) Chen
Illustration
The purpose of this paper is to investigate whether regional differences in the political and institutional environment in China have a remarkable and significant impact on auditor reporting behavior. The study focuses on a single country (China) to examine whether regional variations in institutional development affect the opinion decisions of auditors on Chinese listed companies during the 1996-2007 periods. Updating and extending the study of Chan et al. (2006), this paper specially investigates whether in regions with a low level of institutional development Chinese local auditors are more likely than non-local ones to render standard unqualified opinions to listed state-owned enterprises (SOEs) controlled by local governments, and whether local auditors in institutionally weak regions are more likely than those in institutionally strong regions to issue unqualified audit reports to local SOEs. Using data from China Stock Market and Accounting Research (CSMAR), Wind databases, and NERI Index of Marketization of China’s Provinces, the study finds that companies in institutionally weak regions that switch to a local auditor after receiving a qualified opinion can succeed in opinion shopping. A key finding from a huge number of firm-year observations is politically vulnerable local auditors have incentives to report leniently and favorably on local government-owned companies. Extending this finding, the authors find that it is the combination of local auditor, government ownership, and weak institutional environment that results in more lenient auditor reports.
Type of Research This research is presented in a quantitative mode because there is a relatively strong theoretical foundation for the research to predict causal relationship between independent and dependent
By Chongxiao (Claire) Chen
Illustration
The purpose of this paper is to investigate whether regional differences in the political and institutional environment in China have a remarkable and significant impact on auditor reporting behavior. The study focuses on a single country (China) to examine whether regional variations in institutional development affect the opinion decisions of auditors on Chinese listed companies during the 1996-2007 periods. Updating and extending the study of Chan et al. (2006), this paper specially investigates whether in regions with a low level of institutional development Chinese local auditors are more likely than non-local ones to render standard unqualified opinions to listed state-owned enterprises (SOEs) controlled by local governments, and whether local auditors in institutionally weak regions are more likely than those in institutionally strong regions to issue unqualified audit reports to local SOEs. Using data from China Stock Market and Accounting Research (CSMAR), Wind databases, and NERI Index of Marketization of China’s Provinces, the study finds that companies in institutionally weak regions that switch to a local auditor after receiving a qualified opinion can succeed in opinion shopping. A key finding from a huge number of firm-year observations is politically vulnerable local auditors have incentives to report leniently and favorably on local government-owned companies. Extending this finding, the authors find that it is the combination of local auditor, government ownership, and weak institutional environment that results in more lenient auditor reports.
Type of Research This research is presented in a quantitative mode because there is a relatively strong theoretical foundation for the research to predict causal relationship between independent and dependent