Does the Use of Honorific Appellations in Audit Reports Connote Higher Financial Misstatement Risk? Evidence from China

Abstract

From the sociolinguistic perspective, this study examines whether the honorific and actual-name appellations that Chinese auditors use to address clients in audit reports connote differential financial misstatement risk. Specifically, we hypothesize that auditors’ use of honorifics signals their inferior social status relative to their clients, thereby leading to compromised auditor independence, lower audit quality, and higher financial misstatement risk. We find significantly greater financial misstatements, both in terms of likelihoods and magnitudes, for companies addressed by honorifics than for those addressed by actual names. Moreover, compared to auditors’ consistent honorific usage, discretionary honorific usage has a stronger positive association with misstatements. We further show that the positive association between honorific usage and client misstatement risk weakens when the audit firm is a Top 10 accounting firm in China, is an industry specialist, is formed as a partnership, or resides in a more concentrated audit market. This study contributes to the sociolinguistics literature in accounting and provides evidence supporting the reform proposed by the International Auditing and Assurance Standards Board (IAASB) to enhance the usefulness of audit reporting.

Keywords: Honorific Appellations; Financial Misstatement Risk; Audit Reports; Sociolinguistics

JEL Classification: M41; M42; Z13