Journal of Business Ethics

, Volume 62, Issue 4, pp 367–381

Financial Statement Frauds and Auditor Sanctions: An Analysis of Enforcement Actions in China

Authors

  • Michael Firth
    • School of Accounting and FinanceThe Hong Kong Polytechnic University
  • Phyllis L. L. Mo
    • School of Accounting and FinanceThe Hong Kong Polytechnic University
    • School of Accounting and FinanceThe Hong Kong Polytechnic University
Article

DOI: 10.1007/s10551-005-0542-4

Cite this article as:
Firth, M., Mo, P.L.L. & Wong, R.M.K. J Bus Ethics (2005) 62: 367. doi:10.1007/s10551-005-0542-4

Abstract

The rising tide of corporate scandals and audit failures has shocked the public, and the integrity of auditors is being increasingly questioned. It is crucial for auditors and regulators to understand the main causes of audit failure and devise preventive measures accordingly. This study analyzes enforcement actions issued by the China Securities Regulatory Commission against auditors in respect of fraudulent financial reporting committed by listed companies in China. We find that auditors are more likely to be sanctioned by the regulators for failing to detect and report material misstatement frauds rather than disclosure frauds. Further analysis of the material misstatements indicates that auditors are more likely to be sanctioned for failing to detect and report revenue-related frauds rather than assets-related frauds. In sum, our results suggest that regulators believe auditors have the responsibility to detect and report frauds that are egregious, transaction-based, and related to accounting earnings. The results contribute to our knowledge of auditors’ responsibilities for detecting frauds as perceived by regulators.

Keywords

audit failure audit quality auditor responsibility auditor sanction fraud type

Copyright information

© Springer 2005