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Buy, Lie, or Die: An Investigation of Chinese ST Firms’ Voluntary Interim Audit Motive and Auditor Independence

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Abstract

In the Chinese stock market, special treatment (ST) firms are the firms listed as facing imminent danger of delisting, unless they return to profitability after reporting two consecutive annual losses. Some ST firms voluntarily pay substantial fees to their external auditors to conduct interim audits, which are not required by regulations. In this study, we investigate and find that ST firms that pay for voluntary interim audits report greater discretionary accrued earnings, higher non-operating earnings, and higher returns on assets in ensuing annual reports. As a result, these firms are more likely to return to profitability and reduce their delisting risk. Our results, which contribute to the current debate on auditor independence, appear to be consistent with the possibility that ST firms “buy” external auditors’ cooperation to manipulate earnings when faced with the threat of delisting.

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Abbreviations

ST:

Special treatment

NAS:

Non-audit services

CSRC:

China Securities Regulatory Commission

ACCR:

Total accruals

DAC:

Discretionary accruals

NDAC:

Non-discretionary accruals

TA:

Total assets

REV:

Revenues

REC:

Accounts receivable

PPE:

Property, plants, and equipment

VIA:

Voluntary interim audit

LEV:

Firm leverage

ROA:

Return on assets

S-TYPE:

Type of controlling shareholders, state or non-state

BLOCK:

Percentage of shares owned by controlling shareholder

MKT:

An index of investor protection

Big-10:

An auditor associated with one of the ten largest accounting firms in China

NOPEX:

Non-operating earnings

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Authors and Affiliations

  1. Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, 200240, China

    Alex G. H. Chu

  2. School of Management, Xiamen University, Fujian, 361005, China

    Xingqiang Du

  3. Guanghua School of Management, Peking University, Beijing, 100871, China

    Guohua Jiang

Authors
  1. Alex G. H. Chu
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  2. Xingqiang Du
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  3. Guohua Jiang
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Correspondence to Xingqiang Du.

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Chu, A.G.H., Du, X. & Jiang, G. Buy, Lie, or Die: An Investigation of Chinese ST Firms’ Voluntary Interim Audit Motive and Auditor Independence. J Bus Ethics 102, 135–153 (2011). https://doi.org/10.1007/s10551-011-0804-2

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