Accounting Fraud, Auditing and the Role of Government Sanctions in China

42 Pages Posted: 1 Mar 2014 Last revised: 12 Mar 2015

See all articles by Ling Lei Lisic

Ling Lei Lisic

Virginia Tech - Pamplin College of Business

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics

Yanheng Song

Zhejiang University

Kun Wang

Tsinghua University

Date Written: February 1, 2014

Abstract

We use the unique economic, legal, and political landscape of China to examine the impact of auditors on the incidence and consequences of accounting fraud. In particular, we examine whether large audit firms reduce the incidence of financial statement fraud in China, an emerging market in which auditors face strong government sanctions but low litigation risk associated with audit failures. We find companies audited by large audit firms are less likely to commit financial statement fraud. This effect is stronger for regulated industries, consistent with heavier government monitoring in such industries. This effect is also stronger for revenue-related frauds, consistent with heavier government sanctions for such frauds. After excluding firms cross-listing in other jurisdictions, our results remain robust. Our results are also robust to considering the severity of fraud, using alternative measures of fraud, accounting for the self-selection of auditors and controlling for other corporate governance mechanisms. Our results highlight the role of government sanctions in assuring audit quality and have important practical implications to help international audit firms – and businesses more generally – successfully compete in China.

Keywords: auditor size, financial statement fraud, government sanction, corporate governance

JEL Classification: G34; M42; M48

Suggested Citation

Lisic, Ling Lei and Silveri, Sabatino and Song, Yanheng and Wang, Kun, Accounting Fraud, Auditing and the Role of Government Sanctions in China (February 1, 2014). Journal of Business Research, Vol. 68, Issue 6, pp.1186-1195, 2015 , Available at SSRN: https://ssrn.com/abstract=2402330

Ling Lei Lisic

Virginia Tech - Pamplin College of Business ( email )

3007 Pamplin Hall
Blacksburg, VA 24061
United States

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics ( email )

3675 Central Avenue
Memphis, TN 38152
United States

Yanheng Song

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

Kun Wang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

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