The Impact of Auditors’ Host Country Risk Perception on MNEs’ Earnings Manipulation: Evidence From China

As critical external governance actors, auditors proactively shape cross-border regulatory outcomes. Using data from Chinese A-share listed multinational corporations from 2017 to 2023, our study analyzes text from the “Key Audit Matters†sections of audit reports to develop an index measuring auditors’ host-country risk perception(RP). We empirically investigate how RP influence earnings manipulation practices in multinational corporations. Results show that RP significantly reduce earnings manipulation in multinational enterprises. Mechanism tests reveal that auditors address heightened risk perceptions by raising audit fees and lengthening audit timelines, which directly curbs opportunities for earnings manipulation. The heterogeneity analyses indicate that this negative relationship is more pronounced when auditors possess multinational expertise, the host countries of overseas subsidiaries have weaker rule of law, the geographical distance between overseas subsidiaries and the home country is greater, and the enterprise’s ownership is non-state-owned. By establishing RP as an effective alternative governance mechanism, this research advances the theoretical framework for cross-border audit governance. It also offers practical guidance for emerging markets seeking to reduce multinational corporations’ earnings manipulation through enhanced audit oversight.