Do Blockades to PCAOB Inspections Suggest Lower Audit Quality? The Case of Chinese Companies Listed in the U.S.

56 Pages Posted: 14 Apr 2022 Last revised: 23 Apr 2022

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Yanru Yang

Bentley University

Zhongze Li

Nanjing Audit University

Date Written: March 11, 2022

Abstract

Recently, the SEC adopted rules for the Holding Foreign Companies Accountable Act which bars trading of securities of companies whose auditors are not inspected by the PCAOB. Currently, the PCAOB is unable to inspect the audit work papers of Chinese audit firms that audit U.S.-listed Chinese companies with a total market capitalization of about $2 trillion as of May 2021. Using a sample of 439 pairs of Chinese and U.S. companies matched on industry, company size, and year, we do not observe a significant difference across multiple audit quality proxies. Further, the proportion of companies audited by the Big 4 auditors is higher for the U.S.-listed Chinese companies than their U.S. counterparts. We also find that earnings informativeness is marginally higher for U.S.-listed Chinese companies. Overall, our findings suggest that the lack of inspection by the PCAOB does not result in lower audit quality. Our finding of insignificant differences in audit quality between U.S.-listed Chinese companies and U.S. companies could be due to greater audit efforts by Chinese auditors to bridge the perception gap in audit quality resulting from the lack of inspections by the PCAOB.

Keywords: PCAOB inspections; China; earnings quality; audit quality; ERC

Suggested Citation

Krishnan, Gopal and Yang, Yanru and Li, Zhongze, Do Blockades to PCAOB Inspections Suggest Lower Audit Quality? The Case of Chinese Companies Listed in the U.S. (March 11, 2022). Available at SSRN: https://ssrn.com/abstract=4059296 or http://dx.doi.org/10.2139/ssrn.4059296

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Yanru Yang

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States

Zhongze Li

Nanjing Audit University ( email )

86 Yushan West Road
Nanjing, Jiangsu 210017
China

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