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

Abstract

We examine the influence of auditors on corporate fraud in China. We find lower executive integrity firms are associated with higher propensity of regulatory enforcement actions against corporate fraud in the subsequent year. We then show that this effect is moderated by the issuance of modified audit opinion report by the auditors. This finding implies that auditors can serve an early warning role to discourage low integrity executives from engaging in corporate fraud. Our results have policy implications for further strengthening auditor independence in emerging countries like China.JEL classification: G15; G30; K22; M41

Alternative Governance and Corporate Financial Fraud in Transition Economies: Evidence From China

“…In the last decade, scholarly attention has begun to focus on corporate financial fraud in China. With regard to fraud antecedents, researchers have examined conventional corporate governance mechanisms, such as ownership structure, auditor quality, and board composition (e.g., G. Chen et al, 2006;J. Chen et al, 2013;Hou & Moore, 2010;Liu & Lu, 2007).…”

Assessing Management Integrity: Insights from Big 4 Auditors in Egypt

“…This includes management's commitment to integrity and ethical values, commitment to competence, board of directors or audit committee participation, management's philosophy and operating style, organizational structure, and human resource policies and practices (COSO 2014). Weak integrity encourages unethical decisions and fraudulent behavior (Callaghan, Savage, and Mintz 2007;Rezaee and Riley 2010;Chen et al 2013;Rittenhouse 2015).…”

“…Research in this area focuses on the impact of management integrity (Rezaee and Riley 2010;Chen, Cumming, Hou, and Lee 2013;Rittenhouse 2015) while paying little attention to methods of assessing that integrity. This lack of evidence raises questions about how external auditors might comply with the audit standards in this area and what best practices and deficiencies exist in the assessment of management integrity.…”

Corporate governance and firm performance in an emerging economy context: new evidence from India

“…It is important for the economic development of a country as well as for a significant policy issue for many countries (Claessens and Yurtoglu, 2013;Hoskisson et al, 2013). Financial scams, policy changes etc., have greatly affected the corporate all over the world including Asia (Balasubramanian et al, 2010;Chen et al, 2013;Dayanandan et al, 2019;Globerman et al, 2011). Studies assert that the presence of an audit committee leads to increased investor confidence in the firm (Smaraidos et al, 2018;Kueppers and Sullivan, 2010).…”

“…The various elements considered are board structure (Ameer et al, 2010;Dharmadasa et al, 2014;Brickley et al, 1997), ownership structure (Ameer et al, 2010;Nuryanah and Islam, 2011), managerial ownership (Abdel-Meguid et al, 2014;Nuryanah and Islam, 2011) promoter shareholding, audit committee independence, gender diversity, etc. (Chen et al, 2013;Dayanandan et al, 2019;Filatotchev et al, 2013). Predominantly previous literature, for example, Prentice and Space (2007), Pucheta-Martinez and de Fuentes (2007) had emphasised on analysing the impact of the audit committee on financial reporting process but studies related to its impact on financial performance of a firm are limited.…”