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Individual Auditor Conservatism After CSRC Sanctions

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Abstract

This study examines whether sanctions imposed by the China Securities Regulatory Commission (CSRC) against individual auditors result in greater auditor conservatism. Using a difference-in-differences research design, we find that clients of sanctioned individual auditors have lower discretionary accruals in the post-sanction period than in the pre-sanction period when compared to a matched control group of clients audited by individual auditors who were not sanctioned. Our findings suggest that sanctions imposed by the CSRC on individual auditors can lead to improvements in audit quality by increasing the conservatism of the sanctioned auditors. That is, individual auditors are more likely to resist their clients’ income-increasing accounting manipulations after being sanctioned by the CSRC.

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Notes

  1. The Chinese affiliates of the Big 4 have appealed this decision and the ban will not go into effect until the appeal is heard (e.g., Rapoport 2014).

  2. Other countries that require disclosure of the engagement partner’s name include Taiwan and Australia. The value of having the lead auditor sign his or her name has recently been recognized by other jurisdictions. For example, the International Auditing and Assurance Standards Board's exposure draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing, would require the engagement partner to sign his or her own name. See https://www.ifac.org/publications-resources/reporting-audited-financial-statementsproposed-new-and-revised-international. The Public Company Accounting Oversight Board made a similar proposal in December 2013. See http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf.

  3. In China, auditors in the audit bureau are government employees and not public auditors. See http://www.oecd.org/corporate/ca/corporategovernanceprinciples/1931117.pdf.

  4. Refer to No. 1501 Audit Standards of Chinese CPAs—Audit Report.

  5. Availability heuristic is a type of cognitive biases that individuals perceive high frequencies of an event if this event once occurred (Tversky and Kahneman1973).

  6. See http://www.csrc.gov.cn/pub/csrc_en/.

  7. See http://www.csrc.gov.cn/pub/zjhpublic/index.htm?channel=3300/3313.

  8. Based on the data for year 2005 (i.e., the middle year of our sample period) from the CSMAR-Audit Opinion database, there are around 1,400 individual auditors signing audit reports of listed companies.

  9. All Chinese listed companies use the calendar year as fiscal year. On average, the number of years for the pre-sanction period is 4 years, while the number of years for the post-sanction period is 3.5 years. .

  10. The Compustat Global database provides data on Standard Industry Classification (SIC) for Chinese companies. Prior research usually estimates the Jones (1991) model by SIC industry.

  11. The total number of Chinese firms in the Compustat Global database is 1042, 1124, 1182, 1294, 1329, 1443, 1555, 1576, 1693, 2014, 2274, 2342, and 2368 from 1998 to 2010, respectively. We require at least eight firms in a two-digit SIC industry-year to estimate the Jones model.

  12. All continuous variables are winsorized at the level of 1 and 99 %.

  13. We match each client firm in the treatment group to a client firm audited by non-sanctioned individual auditor with the same two-digit SIC industry code and the closest value of total assets in the same year.

  14. These tests also address possible concerns about the uneven number of pre- and post-sanction observations in the earliest and latest years in our sample period as seen in Panel A of Table 1.

  15. This finding should be cautiously interpreted as the sample size for the warnings sanction is significantly smaller than that for the pecuniary penalties sanction.

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Acknowledgements

We thank anonymous referees for helpful comments. We also gratefully acknowledge Tingting Han and Hong Zhao for research assistance.

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Authors and Affiliations

  1. Odette School of Business, University of Windsor, Windsor, ON, N9B 3P4, Canada

    Jerry Sun

  2. Department of Accounting & Finance, University of Auckland, Auckland, New Zealand

    Steven F. Cahan

  3. Shanghai Lixin University of Commerce, Songjiang, Shanghai, 201620, People’s Republic of China

    Jing Xu

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  1. Jerry Sun
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  2. Steven F. Cahan
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  3. Jing Xu
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Correspondence to Jerry Sun.

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Sun, J., Cahan, S.F. & Xu, J. Individual Auditor Conservatism After CSRC Sanctions. J Bus Ethics 136, 133–146 (2016). https://doi.org/10.1007/s10551-014-2514-z

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