Main Principles and Practices of Auditing Independence in China: A Multifaceted Discussion

Abstract

This paper attempts through a review of the associated literature to describe and critically evaluate the audit market in China by exploring the main factors that affect auditor independence. The study identifies that non-audit service and low-balling/price-cutting are not parameters affecting auditor independence. Regulation can effectively help to maintain audit independence, but the enforcement of those regulations is very poor. Audit firm reputation is established and maintained by fulfilling the obligations of guanxi (personal relationship), rather than by reporting modified opinions fairly and trustfully. Due to government protection, competition in the Chinese audit market is limited and the possibility that Chinese audit firms lower their fees to retain clients is much diminished. Thus, competition and audit firm size appear to be positive aspects for audit independence. However, other national cultural and political-regulatory factors seem to have a moderating effect.

Researching Corruption in Asia: The Accountant and “Five Blind Men”

“…A number of authors have focussed on exploring the linkages with cultural norms by focusing on guanxi, ethical reasoning and accounting. Such authors include Au and Wong (2000), Chan, Lin and Mo (2003), Hua et al (2010) who researched auditor judgements, and others who looked at accounting judgements and estimates . It was found that cognitive moral processes are not the sole determinant in predicting and evaluating levels of professional judgment, and other externalities should also be explored, notwithstanding earlier references to authors that found ethical reasoning a significant influencer on Guanxi driven behaviour, including Au & Wong (2002) themselves.…”