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

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.

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

“…Yang et al (2001) show that the number of administrative sanctions against auditors increased from 100 to about 500 during 1994-1997. During the sample period 1996-2002 of Firth et al (2005), 72 auditors, which are less competent and independent, are sanctioned by the regulatory commission for failing to identify material misstatement frauds from listed companies (e.g., revenue-related frauds).…”

“…Firth et al (2005) the reasons other than the earnings management for a firm to receive modified audit opinion, such as external loan guarantees and litigation cases. A possible explanation for the result is that these unethical behaviours, which normally involve other parties, tend to be much more 26 serious and beyond the personal integrity issues of the executives.…”

Pengaruh Fee Audit, Rotasi Kap, Dan Reputasi Auditor Terhadap Kualitas Audit Di Bursa Efek Indonesia

“…Lugo (2008) Firth et al (2005) menganalisis tindakan penegakan hukum yang dikeluarkan oleh China Securities Regulatory Commission terhadap auditor sehubungan dengan pelaporan keuangan fraud yang dilakukan oleh perusahaan yang terdaftar di Cina. Hasil analisis mereka menemukan bukti bahwa auditor lebih cenderung divonis oleh regulator karena gagal untuk mendeteksi dan melaporkan fraud salah saji material daripada fraud pengungkapan.…”

An Analysis of Administrative Penalty against Accounting Firm and CPA -- Based on the CSRC's Bulletins from 2001 to 2016

“…Many Chinese audit professional standards, laws and regulations have provided the standard of the auditquality.For example, the "Diligent and Responsible" rule in theSecurities lawprovides a good summary.CSRC, one of the most important supervisors of Chinese audit market, measuring the quality of the audit activities in a process-oriented manner. Every year CSRC will hear the law cases, and illegal accounting firms and certified public accountants will be subject to sanctions.Some scholars have investigated the punishments' impact on auditors' behaviors from the perspective of customer's discretional accrual and the auditor's tendency to issue non-standard opinions [1,2]. However, what arethe characteristics of CSRC's administrative penalty?…”