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

50 Pages Posted: 24 May 2018

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Xingqiang Du

Xiamen University - Accounting Department

Shaojuan Lai

Xiamen University

Mary L. Z. Ma

York University

Date Written: December 20, 2017

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

Suggested Citation

Chen, Feng and Du, Xingqiang and Lai, Shaojuan and Ma, Mary L. Z., Does the Use of Honorific Appellations in Audit Reports Connote Higher Financial Misstatement Risk? Evidence from China (December 20, 2017). Rotman School of Management Working Paper No. 3177200. Available at SSRN: https://ssrn.com/abstract=3177200 or http://dx.doi.org/10.2139/ssrn.3177200

Feng Chen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Xingqiang Du

Xiamen University - Accounting Department ( email )

Siming South Road
Duxing Building No.2
Xiamen, Fujian 361005
China
0086-592-2187915 (Phone)
0086-592-2181520 (Fax)

Shaojuan Lai

Xiamen University ( email )

Xiamen, Fujian 361005
China

Mary L. Z. Ma

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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