Critique

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Critique Research of
< The Impact of Government Ownership and Institutions on the Reporting Behavior of Local Auditors in China > By Chongxiao (Claire) Chen
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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 variables. However, while not in a theory-based hypothesis testing mode, the paper nevertheless sets a set of expectations on the basis of a literature review that are test via quantitative methods. This paper involves a controversial and hotly debated accounting issue which is economic, political, legal, and accounting institutions are key determinants of financial market development, corporate-ownership structure, and properties of accounting information around the world. Details of the Research Design

Identify the specific theory, if any, used in the study. This paper neither develops a formal theory nor does it adopt one from any literature as a means of setting its research direction. The authors could review much more literature related to audit reporting and various independent variables that have been found to affect the distribution of audit opinions and then carefully identify those that need further investigation in the current study. Also the paper could specially identify various theories that have been presented in the literature that relate to enhance the research. Identify research hypotheses. There are two sample-based hypotheses that focus on the behavior of local auditors in this paper. First, when the institutional environment is weak, local auditors are more likely than non-local auditors to issue standard unqualified opinions to local SOEs. Second, compared to local auditors in a strong institutional environment, local auditors in a weak institutional environment are more likely to issue standard unqualified opinions to local SOEs. To test the reporting behavior of local versus non-local auditors in different scenarios first hypothesis (H1), this paper investigates the effects of client firm characteristics on audit opinions as follows: the dependent variable, OP, takes a value of 1 if a company receives a qualified audit opinion. The variable interest in this model of H1 is Local, a dummy variable coded 1 for a local auditor and 0...
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