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Corporate Fraud and Accounting Firm Involvement: Evidence from China

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  • Jun Wang

    (School of Business Administration, Northeastern University, No. 195 Chuangxin Road, Hunnan District, Shenyang 110169, China)

  • Duo Wang

    (School of Business Administration, Northeastern University, No. 195 Chuangxin Road, Hunnan District, Shenyang 110169, China)

Abstract

In some cases, accounting firms and individual auditors will be punished by the China Securities Regulatory Commission (CSRC) for involvement in the violations of their client companies. Taking the enforcement actions against listed companies and accounting firms of the CSRC from 2006 to 2019 as a research sample, this paper manually sorted out the specific characteristics of corporate fraud and empirically examined the regulatory authorities’ supervision tendency to auditors. The results show that accounting firms are more likely to be involved when their client companies’ fraudulent practices affect financial statements, occur during the IPO process, and continue for a longer period of time. Income statement manipulation and higher fraud amounts also increase the probability of accounting firms being sanctioned. Further analyses show that regulators’ supervision intensity is increasing over time, and they impose penalties on auditors based on the severity of corporate fraud; however, the intensity and differentiation of the sanctions are still insufficient. This study expands relevant research on accounting firm sanctions and provides empirical evidence for further improvement of audit industry supervision in an emerging market.

Suggested Citation

  • Jun Wang & Duo Wang, 2022. "Corporate Fraud and Accounting Firm Involvement: Evidence from China," JRFM, MDPI, vol. 15(4), pages 1-16, April.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:4:p:180-:d:792961
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    References listed on IDEAS

    as
    1. Lisic, Ling Lei & Silveri, Sabatino (Dino) & Song, Yanheng & Wang, Kun, 2015. "Accounting fraud, auditing, and the role of government sanctions in China," Journal of Business Research, Elsevier, vol. 68(6), pages 1186-1195.
    2. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    3. Allen D. Blay, 2005. "Independence Threats, Litigation Risk, and the Auditor's Decision Process," Contemporary Accounting Research, John Wiley & Sons, vol. 22(4), pages 759-789, December.
    4. Aharony, J & Lee, CWJ & Wong, TJ, 2000. "Financial packaging of IPO firms in China," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 103-126.
    5. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October.
    6. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    7. Paul K. Chaney & Kirk L. Philipich, 2002. "Shredded Reputation: The Cost of Audit Failure," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1221-1245, September.
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    Cited by:

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    2. Hidaya Al Lawati, 2022. "Politically Connected Firms and Forward-Looking Disclosure in the Era of Oman Vision 2040," JRFM, MDPI, vol. 15(6), pages 1-22, May.

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