Executive Integrity, Audit Opinion, and Fraud in Chinese Listed Firms

41 Pages Posted: 1 Jan 2013

See all articles by Jiandong Chen

Jiandong Chen

Southwestern University of Finance and Economics

Douglas J. Cumming

Florida Atlantic University

Wenxuan Hou

University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Edward Lee

University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2012

Abstract

We examine the influence of auditors on mitigating corporate fraud in China, which is known to have weak legal enforcement, weak investor protection along with tight control of the media and labour unions. We find that firms with executives that have lower integrity, indicated by a greater degree of earnings manipulation, are associated with higher propensity of regulatory enforcement actions against corporate fraud in the subsequent year. We show that this effect is moderated by the issuance of a modified audit opinion report by the auditors. This finding implies that auditors can serve as external governance mechanism to discourage executives with lower integrity in committing fraud. Our results have policy implications for further strengthening auditor independence in emerging countries like China.

Keywords: Integrity, auditor, earnings management, fraud, China, MAO

JEL Classification: G15, G30, K22, M41

Suggested Citation

Chen, Jiandong and Cumming, Douglas J. and Hou, Wenxuan and Lee, Edward, Executive Integrity, Audit Opinion, and Fraud in Chinese Listed Firms (October 1, 2012). Emerging Markets Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2195285

Jiandong Chen

Southwestern University of Finance and Economics ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

HOME PAGE: http://cjd.weebly.com

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

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