Auditor independence issues in China

Abstract

China is conducting an open market policy and Chinese firms are seeking independent audit services. As a result, the Chinese accounting profession is expanding at a tremendous speed, and has played an important role in economic reform. However, Chinese auditing operates in a very different environment from those experienced in Western countries. Consequently, there is considerable concern about auditor independence in China. The purpose of this paper is to examine some reasons for a lack of independence in the Chinese audit profession. We critically review empirical evidence regarding auditor practice in China. We then make some suggestions that might improve auditor independence.

Executive integrity, audit opinion, and fraud in Chinese listed firms

“…DeAngelo (1981), Yang et al (2003) and Krishnan et al (1996) regard modified audit opinion (MAO) as a proxy for auditor independence. Until 1990s, audit independence in China was a big concern because auditors played the role of agents of the state audit bureau and bore little economic responsibility for their improper auditing actions, such as pleasing their clients or pursuing their own interests.…”

Auditing Issues with Chinese Reverse Merger Companies Traded in the United States

“…There are two characteristics of the practice of accounting and auditing in China that threaten auditor independence and audit quality (Yang et al 2003). The first is the relationship between the Chinese government and auditing firms.…”

“…CPA firms in China are regulated by the Chinese Institute of Certified Public Accountants (CICPA) (Yang et al 2003). However, CICPA is a government-controlled body and all of its decisions must be ratified by the Ministry of Finance (MOF).…”

“…In addition, in some cases, government agencies had the authority to require businesses that they controlled to be audited by CPA firms that they controlled (Yang et al 2003).…”

“…The Public Company Accounting Oversight Board (PCAOB) is charged with inspecting auditors" work but has been systematically thwarted in its attempt to examine the work of auditors of these companies in the People"s Republic of China (PRC). These issues relate to characteristics of the practice of accounting and auditing in China that threaten auditor independence and audit quality (Yang et al 2003). The next section provides background information about the practice of accounting and auditing in China.…”