When Bonding Fails: Audit Firm Oversight of US-Listed Chinese Companies

58 Pages Posted: 3 Apr 2014 Last revised: 4 Apr 2014

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies

Clive S. Lennox

University of Southern California

Terry L. Neal

University of Tennessee

Date Written: March 30, 2014

Abstract

Although "good" companies have incentives to signal their types by listing in the strict regulatory environment of the US, there have been an unprecedented number of recent accounting frauds by US-listed Chinese companies. We argue that the traditional bonding argument failed for US-listed Chinese companies due to a lack of audit quality and audit firm oversight. We find: 1) that US-listed Chinese companies were more likely than US-listed companies from other countries to avoid hiring high quality annually-inspected US audit firms, and 2) that investors reacted negatively to news that US regulators would be unable to provide oversight of Chinese auditors.

Keywords: Audit quality, Audit firm oversight, PCAOB inspections, Chinese companies, Fraud

Suggested Citation

Carcello, Joseph V. and Carver, Brian Todd and Lennox, Clive and Neal, Terry L., When Bonding Fails: Audit Firm Oversight of US-Listed Chinese Companies (March 30, 2014). Available at SSRN: https://ssrn.com/abstract=2419152 or http://dx.doi.org/10.2139/ssrn.2419152

Joseph V. Carcello (Contact Author)

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies ( email )

Clemson, SC 29634
United States

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Terry L. Neal

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

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