Resumen de Auditors’ Role in China: The Joint Effects of Guanxi and Regulatory Sanctions on Earnings Management
Ning Du, Joshua Ronen, Jianfang Ye
This study investigates the role of Chinese auditors in preventing aggressive management financial reporting. We conduct two experiments to investigate auditors’ behaviors. The first experiment examines auditors’ awareness of earnings management (EM) attempts induced by the delisting rule. One hundred seventy-four Chinese auditors participated in the study. The evidence shows that auditors believe the use of the classification of investment transactions to avoid losses is appropriate. The second experiment investigates whether the bond (Guanxi) between managers and auditors may have contributed to auditors’ reluctance to mitigate delisting-motivated EM and whether increased regulatory enforcement may moderate this behavior. We find that Guanxi undermines auditors’ ability to correct EM. Specifically, when auditors have close bond (Guanxi) with managers, they are less likely to recommend adjustments; however, we find that increased penalty has a positive effect on auditors’ performance, as harsh penalties/sanctions enhance their willingness to challenge managers’ decisions.
