China-Related Research in Auditing:

A Review and Directions for Future

Research*

Dan A. Simunica and Xi Wub, **

a
Sauder School of Business, The University of British Columbia, Canada
b
School of Accountancy, Central University of Finance and Economics, China

1. Introduction

Academic research concerning independent audits of financial statements, including

the economic incentives and relations surrounding audit contracts and audit processes, is
relatively new. Prior to the mid-1970’s, auditing was viewed as a purely practical activity,
governed by technical rules largely set by the profession itself. But of course, auditing is
a professional business practiced in the broader economy. As such, auditors are subject
to economic incentives and the discipline of markets and regulations in which they
operate. Moreover, the incentives facing auditors are unusually complex. An independent
audit of financial statements is valuable to both existing and potential shareholders and
to creditors who do not contract directly with the auditor. Rather, an auditor usually
transacts with the legal entity (the company) and interacts extensively with the entity’s
management whose assertions in the financial statements are the task of the auditor to
verify. In addition, neither the quality of an audit nor the auditor’s work effort involving
complex judgments concerning the nature, extent, and timing of evidence to be collected
are directly observable, even to the company’s management. Finally, auditors are
subject to a considerable amount of professional and government regulation, and these
regulations vary by country. Despite such complexities, auditing is a thriving business
world-wide and high quality audits are widely recognized to be critically important to the
proper functioning of capital markets. These characteristics and complexities contribute
to making auditing an interesting and important research area.

* Invited paper.
** Corresponding author. Dan A. Simunic: E-mail address: [email protected]. Xi Wu: E-mail address:
[email protected]. Correspondence address: School of Accountancy, Central University of Finance &
Economics, Beijing, China, 100081.

1
CHINA JOURNAL OF ACCOUNTING RESEARCH, Vol 2 Issue 2 © LexisNexis, 2009
2 Dan A. Simunic and Xi Wu

In a recent working paper, Lesage and Wechtler (2009) summarize and perform a
content analysis of 3,143 abstracts of auditing research papers from 25 academic journals
that publish in the English language from the year of commencement of each journal up
to 2005. Among other interesting findings, they report that prior to 1977 less than 20
auditing research papers per year were published in this large group of journals and that
these papers largely dealt with technical audit practice issues and auditing education. The
field began to change in the last years of the 1970’s when publication rates first exceeded
20 papers per year and topics began to change to emphasize behavioural experiments in
auditing and the use of statistical methods in audit practice. These two research themes
continued to dominate in the 1980’s while the number of published papers increased
dramatically to 744 in that decade (rising from 35 papers in 1980 to about 100 papers
in 1989). From about 1990, the research themes again changed to emphasize economic
issues, including auditing markets, audit pricing, litigation against auditors, corporate
governance, earnings management, and issues in international auditing. Meanwhile, the
volume of research papers continued to grow peaking (in the authors’ data period) at
about 160 published papers in 2002. Our impression is that this growth in the volume
of research has continued unabated and that economic research themes continue to
dominate the academic auditing literature.
While the Lesage and Wechtler paper provides a useful global overview of the
development of auditing research, little is known about how auditing research from a
Chinese perspective has developed and evolved. Our goal is to provide this perspective
by first summarizing the papers that have appeared in international journals that deal
with Chinese auditing issues. Having described the ‘state-of-the-art’ of Chinese auditing
research, we then identify some research opportunities and offer suggestions for further
work in this interesting, important, and growing research area.

2. Overview of Chinese Auditing Research

The accounting profession in China has achieved remarkable progress since its
reestablishment in the 1980s. Similar to the global growth of auditing research, an
increasing body of studies on China-related auditing issues has been published in recent
years in a variety of internationally refereed accounting journals. We focus our review
on studies of the public accounting profession, external auditing, and audit committees
in Mainland China.1 Appendix A presents a list of 33 international accounting journals

1
Auditing research based on Hong Kong, Taiwan, or Macau data is not included. We exclude three publications
(Chan and Chow, 1997; Chan and Mo, 2000; and Chan and Mo, 2002) on tax audits in China because
such audits are conducted by Chinese tax authorities rather than external auditors. However, we include in
our review a few studies (eg, Kachelmeier and Shehata, 1997; Chan, Lin and Mo, 2003) that deal with the
corporate accounting control and errors which have implication for external auditors.
 China-Related Research in Auditing:
A Review and Directions for Future Research 3

among which we searched for publications of China-related auditing research. 2 Appendix

B chronologically lists the 40 identified publications with full references. Although
we have tried to select China-related auditing studies from as many international
accounting journals as we reasonably could, the reviewed publications are by no means
exhaustive. Nonetheless, we are confident that the body of searched studies consists
of the majority of international publications on China-related auditing issues. Table 1
presents the by-journal and by-year distributions of published studies that we identified.
That table indicates that China-related auditing research has been published in a variety
of established international accounting journals, and the number of publications appears
to be rapidly increasing in recent years. Because of their additional unique perspectives
on auditing in China, we supplement our sample with a number of papers we are aware
of that are either published in other journals,3 are currently forthcoming (eg, Chen, Su,
and Wu, 2009, 2010; Chen, Sun and Wu, 2010), or that have circulated at international
conferences (eg, Firth, Mo and Wong, 2005b; Chan and Wu, 2008). Therefore, nearly
50 studies on China-related auditing issues are reviewed.

Table 1. China-Related Auditing Research Published in International Accounting Journals

Panel A: By-Journal Distribution
Number of publication*
Accounting, Auditing and Accountability Journal 2
Accounting Horizons 1
Accounting, Organizations and Society 1
Auditing: A Journal of Practice and Theory 4
Contemporary Accounting Research 1
Corporate Governance: An International Review 2
Critical Perspectives on Accounting 1
International Journal of Auditing 5
Journal of Accounting and Economics 2
Journal of Accounting and Public Policy 2
Journal of Accounting, Auditing and Finance 2
Journal of International Accounting, Auditing and Taxation 3
Journal of International Accounting Research 2
Journal of International Financial Management and Accounting 2

2
We also searched among 25 international finance journals but found no publications on China-related auditing
issues. For more details about the literature searching process, see Li and Wu (2009).
3
For example, we include in our review a number of early commentaries on China-related auditing issues
published in the commencing stage of China Accounting and Finance Review (Tang, 1999; Trotman, 1999;
Wallace, 2000). The Firth, Mo and Wong (2005a) study published in Journal of Business Ethics is also included
in our review as the study is among the few that empirically examines auditor legal liability in China.
4 Dan A. Simunic and Xi Wu

Number of publication*
Review of Accounting Studies 1
The Accounting Review 1
The British Accounting Review 1
The International Journal of Accounting 7**
Total (1978-2007) 40

Panel B: By-year Distribution

Number of publication*
1996 1
1997 1
1999 2
2000 4
2001 4
2003 4
2004 1
2005 2
2006 2
2007 4
2008 10**
2009 (cutoff end of May 2009) 5
Total 40

* The number includes all publications that we identify since the inception of a specific journal (covered in the list as shown in
Appendix A) through to May 2009.
** The number includes one discussion paper and one reply paper.

From this literature, we identify a number of topics and issues in China-related

auditing research. These include: (1) the development of the Chinese public accounting
profession, (2) auditing standards in China, (3) the audit firm disaffiliation program,
(4) demand for auditing and auditor choice, (5) attributes of audit quality, (6) auditor
reporting, (7) audit pricing, (8) auditor legal liability and sanctions, (9) users’ response
to auditing and auditor information, (10) cultural and ethical perspectives on auditing,
and (11) audit committees. Since the number of papers is not too large, we next review
these individual studies to provide a sense of the research questions, methods, and
findings of this variety of research papers.
 China-Related Research in Auditing:
A Review and Directions for Future Research 5

3. Development of Public Accounting Profession in China

Tang (1999) discusses issues affecting the development of the Chinese accounting
profession, including the independence of Chinese CPAs, professional competence,
professional ethics, the setting of accounting standards, and the legal liabilities of
Chinese CPAs.
Hao (1999) describes the changes in the organization and regulation of
accounting practitioners in China during the twentieth century and argues that the
professionalisation process of the public accounting profession in China is very different
as compared to the West, and that the Chinese government maintains a dominating
influence over the Chinese accounting profession.
Extending Hao (1999) by using a political and ideological perspective, Yee
(2009) examines and explains the circumstances leading to the re-emergence of the
public accounting profession in China in the early 1980s. Her analysis highlights the
authoritative and dominant role assumed by the Chinese state in the whole societal set-
up through effectively exercising its political and ideological leadership.
Tang, Chow and Lau (1999) provide an overview of the historical development of
the State-owned enterprise (SOE) audits in China and discuss the challenges facing
such audits. They conclude that, with ownership of the SOEs being further diversified
and the operation of the SOEs being increasingly market-oriented, SOEs need a non-
government third party to verify their financial statements to meet the information
needs of various stakeholders in the SOEs.

Early Research Agenda, Framework, and Opportunities

Graham (1996) identifies a number of auditing research issues in China. As he

points out, these issues arise in the current economic environment, but are heavily
influenced by political, cultural and historical circumstances. Organizational,
technical and economic issues are identified that likely impact the practice of auditing
in China.
Wallace (2000) analyzes the accounting profession in China using a six-way
framework: (1) legal environment; (2) political environment; (3) technological
environment; (4) market setting; (5) self-disciplinary and external regulatory
environment; and (6) intra-firm (organizational) considerations. Using the United
States as a basis for comparison, he describes unique aspects of Chinese developing
markets within these dimensions of the profession and identifies a number of research
opportunities.
Davidson and Chang (2001) report on a survey of Chinese auditors and accounting
academics concerning the importance of a number of auditing topics. They find that
Chinese auditors are very concerned about their professional responsibilities and legal
liabilities, and are more concerned with the traditional audit approach rather than the
newer risk-based audit approach.
6 Dan A. Simunic and Xi Wu

Trotman (1999) outlines possible research questions suited to China for each of
the three areas of audit judgment research including policy capturing, group decision
making, and factors affecting auditor performance and auditor judgments. Table 2
summarizes the opportunities and research questions that he suggests for each of these
areas. He concludes that the changing role of the audit profession in China provides
an excellent opportunity to further incorporate the distinctive institutional, economic,
and social features of audit settings into research designs. However, it is important
to articulate how these factors vary within China and hypothesize and test how these
differences are likely to impact on auditor judgments.

Table 2. Opportunities Identified by Trotman (1999) for Audit Judgment Research in China
Research questions (and possible
Research Areas Opportunities
implications)
Given the newness of audit judgments in To consider the level of consensus between
China it is likely that in the early years of auditors on some of the key judgments.
Policy capturing development there may be relatively low Understanding the areas in which consensus
levels of consensus. is low may help audit firms to concentrate
their training and review resources.
Cultural differences between Chinese To investigate some of the specific research
auditors and those from Western cultures are questions outlined by Rich, Solomon, and
likely to have significant impact on the effect Trotman (1997) (see Trotman (1999, 56-57)
of environmental factors such as perceived for details), particularly to study the cultural
Group decision making riskiness, the effect of budget pressure, and impact on the review process.
business risk. Great insight will be achieved about how the
It is also likely that cultural differences review process and/or audit teams will vary
will result in different reviewer-specific between the cultures.
characteristics.
The development of new audit approaches To investigate the changes in knowledge
in China, and the extensive training that is structure as Chinese auditors gain experience
likely to be involved, could provide a unique in a different audit environment.
setting for longitudinal studies of audit The rate of learning can also be compared
Determinants of judgment. between new auditors and auditors with
judgment performance experience in different types of audit
(knowledge and environments.
memory) To study the acquisition of knowledge in
environments with different incentives,
cultural backgrounds, and institutional
frameworks.

Most of the few previous studies about To study how the effect of accountability,
the effect of other environmental and prior involvement, time pressure, and
Determinants of motivational factors on judgment incentives on judgment performance may
judgment performance performance have been conducted in US. vary across cultures.
(other environmental Given that results could be highly sensitive To test how the decision aids developed in
and motivational factors) to the culture in which they are conducted, a US audit environment would perform in
cross-cultural research is warranted. the local environment prior to their formal
introduction.
 China-Related Research in Auditing:
A Review and Directions for Future Research 7

4. Chinese Auditing Standards

The Development of Auditing Standards

Chinese independent auditing standards (CIAS) have been promulgated since 1995.
Xiao, Zhang and Xie (2000) identify various factors that motivated the setting of the
CIAS. They also discuss some major features of the Chinese audit market that would
significantly hinder the further development of the audit profession (and particularly the
effectiveness of auditing and accounting standards) in China.
Lin and Chan (2000) further describe the framework of the CIAS and make a
comparison of the CIAS and the technical pronouncements issued by the International
Federation of Accountants (IFAC). They find that the Chinese standards most closely
resemble international standards and guidelines in a number of important dimensions.
Although Lin and Chan (2000) document a few differences between the then CIAS
and the IFAC technical pronouncements, recent efforts have been made to update the
CIAS to be significantly convergent with International Standards on Auditing (ISAs).
For example, in December 2005 the Chinese Auditing Standards Board (CASB) and
the International Auditing and Assurance Standards Board (IAASB) released a joint
statement4 in which the CASB stated that the fundamental principle of drafting Chinese
auditing standards was to improve the Chinese auditing standards system and to
accelerate its convergence with the ISAs (Simnett and Sylph, 2006).

The Consequences of Auditing Standards

A number of studies have explored the consequences of adopting new auditing

standards in China. DeFond, Wong and Li (2000) find that the frequency of modified
opinions increased nine-fold subsequent to the adoption of the first batch (ie, the Jan.
1996 batch) of auditing standards, which suggests increased auditor independence.
However, the increase in modified reports was followed by a decline in audit market
share among large auditors (who have the greatest propensity to issue modified reports).
The authors conjecture that this ‘flight from audit quality’ results from a limited demand
for truly independent auditors in China. They conclude that government regulation
alone is insufficient to create financial markets that foster auditor independence.
Sami and Zhou (2008a) investigate the impact of the implementation of the first
(ie, Jan. 1996) batch of Chinese auditing standards on the information environment.
They measure the improvement in accounting disclosure and information environment
from both the market perspective (trading volume, price volatility, and stock price
synchronicity) and the accounting perspective (non-core earnings). They find that
following the adoption of new auditing standards, companies experience a significant

4
Available at www.ifac.org/Downloads/joint_statement_december_2005.pdf.
8 Dan A. Simunic and Xi Wu

increase in trading volume and price volatility, a significant decrease in earnings

management, and a significant decrease in price synchronicity reflecting more
capitalization of firm-specific information relative to general market information.
In another market-perspective study, Zhou (2007) examines the impact of
implementing the first and second (ie, Jan. 1996 and Jan. 1997) batches of auditing
standards in China on information asymmetry measured by the bid-ask spread. The
sample consists of 210 firms whose financial statements were never audited under
any auditing standards prior to the adoption of the new auditing standards in China
(experimental group), and 61 firms whose financial statements were prepared with
international accounting standards and were audited with international auditing
standards (control group). She finds that for both of the two batches of auditing
standards, the firms in the experimental sample experienced significant reductions in
their bid-ask spreads subsequent to the adoption of the new auditing standards. In
contrast, such a change in bid-ask spread is not observed in the control group. She
concludes that auditing regulation can permanently reduce long-run information
asymmetry risk in an emerging capital market.
In his discussion of Sami and Zhou (2008a), Haw (2008) expresses a number of
concerns, which are generally echoed by Sami and Zhou (2008b). First, researchers face a
difficulty in research design to tease out the effect of new auditing standards from many
other concurrent institutional and economic developments (particularly in a transitional
economy like China), all of which likely affected the information environment and stock
market performance in the test period. Another difficulty arises from the lack of proper
incentives for Chinese managers and auditors as well as weak corporate governance
structures in China (similar to views expressed in DeFond, Wong and Li, 2000; Xiao,
Zhang and Xie, 2000). Thus, the documented empirical evidence in Sami and Zhou
(2008a) would suggest an indirect linkage between the new auditing standards and
the information environment, rather than ‘causality’. Haw (2008) calls for additional
research that could shed more light on how new auditing standards affect the monitoring
role of an audit, the quality of auditing, auditor litigation, and the enforcement of audit
standards.

5. The CPA Firm Disaffiliation Program

Besides the development of Chinese auditing standards, another fundamental

institutional change in the Chinese auditing market is the CPA firm disaffiliation
program around 1997-1999. Chinese CPA firms were established and initially owned
by government or other sponsoring bodies. This situation has caused much concern
regarding auditor independence in China. A program to disaffiliate CPA firms from
their sponsoring body began in 1997. Yang, Tang, Kilgore and Jiang (2001) hypothesize
that disaffiliated CPA firms face a higher degree of market risk than affiliated firms, and
therefore act more independently. They find that the number and percentage of non-
 China-Related Research in Auditing:
A Review and Directions for Future Research 9

standard opinions has increased dramatically since 1997 and attribute this change to the
disaffiliation program.
While Yang, Tang, Kilgore and Jiang (2001) provide some, largely descriptive
evidence on this issue, Gul, Sami and Zhou (2009) provide a more comprehensive
analysis of the effect of the audit firm disaffiliation program in China. They find that
the likelihood of receiving qualified audit opinions by public companies significantly
increased after the disaffiliation program. This result holds not only for companies
previously audited by affiliated auditors, but also for companies previously audited
by nonaffiliated auditors. The authors also find that in the post-disaffiliation period,
companies have lower non-core operating income than in the pre-disaffiliation period.
These results suggest that it was the disaffiliation program, but not the act of auditor
disaffiliation itself that improved auditor independence. Furthermore, they find that the
increase in the likelihood of issuing qualified audit opinions is greater for small auditors
compared with large auditors, which suggests that audit quality of large and small audit
firms tended to converge as a result of the disaffiliation program.

6. Demand for External Auditing and Auditor Choice

Demand for External Auditing

A number of non-Chinese studies have explored the determinants or consequences

of a voluntary demand for external auditing (eg, Chow, 1982; Blackwell, Noland
and Winters, 1998; Carey, Simnett and Tanewski, 2000). Haw, Qi and Wu (2008)
supplement this line of research by investigating the determinants and consequences
of the voluntary demand for semi-annual financial audit by some listed Chinese
companies5. Based on a sample of 2,458 semi-annual interim reports released by listed
Chinese firms from 1996 to 1999, they find that the choice of voluntary auditing is
positively associated with the percentage of tradable shares, profitability, and company
size. They also find that the earnings response coefficients of audited firms are higher
than those of unaudited firms, especially when the auditing is voluntary. Their findings
are consistent with the notion of management voluntarily purchasing external auditing
to enhance the credibility of accounting numbers.

5
Although the auditing of interim reports is mandatory for a subset of listed Chinese firms in circumstances that
are specified by Chinese regulators, a number of firms voluntarily acquire auditing services for their interim
reports.
10 Dan A. Simunic and Xi Wu

The Impact of Political Institutions on Auditor Choice

The corporate ownership structure in the Chinese transitional economy is

characterized by the dominance of government (or state) owners. Chan, Lin and Zhang
(2007) use agency theory to test whether the demand for quality-differentiated audits
by listed Chinese companies is systematically associated with changes in ownership
structure. They find that a decrease in government held shares and a corresponding
increase of institutionally held shares leads to a general increase in the demand for
higher-quality audits in Chinese stock markets. The authors do not find that individual
shareholders play a significant role in a firm’s auditor-choice decision. They conclude
that the introduction of large institutional blockholders can have a beneficial effect on
the average quality of audits in a transitional economy.
Wang, Wong and Xia (2008) analyze how political and economic institutions affect
the choice of auditors in China. Using a sample of firms covering the period from 1993
to 2003, they find that local SOEs are more likely than non-state firms to hire small
local auditors. In addition to local SOEs, central SOEs are also more likely than non-
state owned firms to hire small local auditors in regions where political and economic
institutions are less developed, but this tendency of local and central SOEs to hire small
local auditors is significantly attenuated in regions with more developed economic and
political institutions.

The Impact of Client Opportunistic Incentives on Auditor Choice

In a US study of forced auditor changes following the Arthur Andersen (AA) demise,
Blouin, Grein and Roundtree (2007) find that while clients with higher accruals are
more likely to follow a former AA audit team to a new audit firm, such clients do not
report significantly more aggressive accruals in the first post-switch year as compared
with their non-follower client counterparts. Using data from a similar forced audit firm
change setting from the Chinese stock market (where the identities of audit engagement
partners are also publicly available), Chen, Su, and Wu (2009) refine the measurement of
the auditor switch effect by explicitly identifying audit engagement partners. Consistent
with Blouin, Grein and Roundtree (2007), they find that: (1) clients with greater
earnings management activities are more likely to follow their former audit partners to
a new audit firm, and (2) aggressive follower clients (ie, those that were in the highest
earnings management quartile prior to the forced auditor switch) who are audited by
former partners, do not report abnormally high earnings management items in the first
post-switch year. However, the authors also find that (3) while new audit firms are more
likely to rotate former partners in the auditing of follower clients in the first post-switch
year, a large number of these partners return to their former clients in subsequent years,
and (4) the financial reporting of aggressive follower clients who are audited by former
partners becomes significantly more aggressive in the second and third post-switch
years. These findings indicate that the former partner conservatism as suggested by
 China-Related Research in Auditing:
A Review and Directions for Future Research 11

Blouin, Grein and Roundtree (2007) may be temporary in nature, and former partners
may adopt a strategic approach to auditing follower clients to realize the opportunistic
benefits of maintaining a close partner-client relationship.
In another study of voluntary auditor changes, Chen, Su, and Wu (2010) examine
auditor-client relationships following the high-profile merger of a local Chinese audit
firm, Da-Hua CPAs, with a Big 4 firm, Ernst & Young, to create EYDH in early 2002.
Of the 46 domestically listed clients Da-Hua had at the time of the merger, 30 switched
to other audit firms during 2002-04. This large loss of clients could be attributed either
to a lack of post-merger managerial and cultural congruence between EYDH and certain
clients, or to a lack of demand for high quality audits. Chen et al. examine 11 (13)
switching clients in 2002 (2004) as early (late) switchers. Although their archival analyses
suggest that the switching decisions of early switchers are more likely to be explained by
common factors such as changes in client structural characteristics, post-merger client
portfolio management by EYDH, and client-auditor friction over accounting treatments,
late switchers do not differ from late non-switchers in terms of these factors. However,
the authors find some evidence that late switchers follow their audit partners to a local
audit firm mainly for greater discretion over financial reporting. Further, semi-structured
focused interviews revealed that late switchers found it difficult to adapt to EYDH’s
practices which, in their view, were less cooperative and too risk aversive. Overall, the
results of this paper are consistent with the notion that clients switch from Big 4 to local
audit firms mainly to obtain more lenient audit treatments.

The Impact of Corporate Governance on Auditor Choice

Lin and Liu (2009) examine the impact of internal corporate governance mechanisms
on the auditor choice decisions made by IPO firms becoming listed in China during
the ‘bear market’ period of 2001–2004. The authors use three variables to proxy for
internal corporate governance mechanisms, ie, the ownership concentration, the size
of the supervisory board (SB), and the duality of board chairman and CEO. They find
that firms with more dominant controlling shareholders, with a smaller size of SB, or in
which the board chairman and CEO are the same person, are less likely to hire a high-
quality auditor (measured as a Chinese Top-10 or Big 4 auditor). The authors suggest
that when the benefits from lowering capital raising costs are trivial, firms with weaker
internal corporate governance mechanisms are inclined to choose a low-quality auditor
so as to capture and sustain the gains from opaqueness in financial reporting.

7. Auditor Attributes Perceived as Important to Audit Quality

Chen, Shome and Su (2001) conducted a questionnaire survey (with 149 usable
responses) on the attributes perceived as being important to audit quality. The survey
was administered to auditors from a local CPA firm and a Big 5 firm operating in
12 Dan A. Simunic and Xi Wu

Shanghai, as well as to subjects who functioned as regulators. The authors found that the
regulators group appeared to be the most distinct, suggesting that auditors and regulators
have different views with respect to factors that are most important in determining audit
quality. Local and Big 5 auditors were the closest among all comparison pairs, although
their views differed on some dimensions.
Chow, Ho and Mo (2006) survey 102 experienced Chinese auditors (from Big 4
affiliates and local audit firms) regarding several components of the audit process. These
include the extent to which Chinese audit firms employ structured audit processes, the
firms’ evaluation of potential clients, factors that impact audit firm risk assessment,
and the stringency of the reporting standards that firms seek to impose on clients. The
authors find that: (1) consistent with prior studies and expectations, the two types of
firms have substantially different clienteles; (2) Big 4 firms have substantially higher
structure in their audit approaches than the local firms; (3) the firms are remarkably
similar in terms of the factors that they consider to be important in the client acceptance
decision; and (4) there is a substantial overlap in the factors viewed by the two types
of audit firms as having the biggest impacts on the difficulty of risk assessment and the
stringency of accounting/reporting standards imposed on clients.

8. Auditor Reporting

General Analysis

Chen, Su and Wang (2005) present a descriptive analysis of the rapidly developing
Chinese auditing environment and the high percentage of modified audit opinions
(MAOs) issued in the period between 1995 and 2000. From 1995 to 2000, more than
15% of the annual reports of listed companies received MAOs every year, which is
high compared with that in many other countries, such as the US, with more mature
stock markets. Given that issuing MAOs requires auditors to withstand client pressure
to deliver a normal, ‘clean’ opinion, there must be mechanisms in China to motivate
auditors to issue MAOs. The authors’ analysis of the Chinese auditing environment
suggests that government regulations through licensing and disciplinary actions, self-
protection considerations, and poor earnings quality are the main reasons for auditors
to issue MAOs. They also find that weak corporate governance is another factor
contributing to the large number of MAOs in China.

Political and Other Institutional Influences on Auditor Reporting

Chan, Lin and Mo (2006) examine whether auditor opinions are affected by political
and economic influences from governments. They use auditor location (local versus non-
local auditors) to capture such influences from local governments in China. Based on
data from China’s stock markets for the period 1996-2002, the authors find that local
 China-Related Research in Auditing:
A Review and Directions for Future Research 13

auditors, who have greater economic dependence on local clients and are subject to more
political influence from local governments than non-local auditors, are more likely to
report favorably on local government-owned companies. Moreover, they find that local
government-owned companies that switched from a non-local auditor to a local auditor
after receiving a qualified opinion can succeed in opinion shopping.
Prior studies from other countries demonstrate that audit opinions provide strong
signals to investors/debt holders warning of firms’ possible default. Ting, Yen and Chiu
(2008) examine this relationship within the Chinese stock market, and explore whether
there was any significant shift in this relationship following the entry of Qualified
Foreign Institutional Investors (QFIIs) after 2002. It can be expected that the role of
audit opinions grows in importance when foreign investors are allowed to enter the
market. Using Chinese stock market data from 1999 and 2005, the authors find that
audit opinions began providing signals of potential default risk only after QFIIs entered
the market (ie, during 2003 and 2005). This phenomenon even exists among companies
without QFII ownership during 2003-05. Their findings imply that market maturity
could prompt auditors’ decisions to become more conservative, and that institutional
investors serve to play a monitoring role.
Chen, Sun and Wu (2010) examine how the legal and regulatory changes in China
affect the relationship between client economic importance and audit quality. At the
individual auditor level, they find that the propensity to issue modified audit opinions
(MAOs) is negatively correlated with client importance from 1995 to 2000. However,
from 2001 to 2004, when the institutional environment became more investor
friendly, the propensity to issue MAOs is positively associated with client importance.
These findings are corroborated by an analysis of regulatory sanctions. The authors’
results suggest that institutional improvements prompt auditors to weigh the costs of
compromising audit quality over the economic benefits gained from important clients.
Another finding of the study is that the impact of client importance on audit decisions
appears to be different at the individual auditor and office levels.

The Impact of Organizational Form on Auditor Reporting

Analytical research suggests that limiting the liability of accountants poses a

threat to audit quality. However, there is little existing empirical evidence to support
this argument. Firth, Mo and Wong (2005b) investigate this issue by examining the
association between the legal forms of Chinese CPA firms (unlimited liability versus
limited liability) and the reporting conservatism of auditors. Based on a sample of 2,767
Chinese listed company audits from the period 2000 to 2002, the authors find that
to compensate for higher risk and liability exposures, auditors in unlimited liability
partnership firms are more likely to have a higher threshold for issuing clean audit
reports, and thus are more conservative in their reporting. In addition, they find that a
client that switches its auditor from a limited liability firm to a partnership firm is more
likely to receive a modified report.
14 Dan A. Simunic and Xi Wu

The Relationship between Earnings Management and Auditor Reporting

Chen, Chen and Su (2001) investigate the empirical relationship between earnings
management induced by profitability regulation and modified audit opinions (MAOs)
in the Chinese stock market during 1995 and 1997. They find a significant association
between receiving MAOs and reporting profits marginally above the target levels
specified in stock de-listing and rights offering regulations. Their findings illustrate a
trade-off between expected benefits and costs of avoiding MAOs made by corporate
managers in a transitional economy.

The Effect of Corporate Ownership and Governance on Auditor Reporting

Firth, Fung and Rui (2007) examine how ownership, a two-tier board structure, and
auditors, affect the informativeness of earnings for companies listed in China. Using the
audit opinion as one of their three proxies for the informativeness of earnings and using
data from 1998 and 2003, the authors find some evidence that the type of dominant
shareholder, the size of the supervisory board, and the percentage of independent
directors have an impact on the frequency of modified audit opinions.

The Audit Firm Size Effect on Auditor Reporting

Unlike developed audit markets, the emerging Chinese auditing market is much less
concentrated. Taking advantage of this market structure, Li, Song, and Wong (2008)
using Chinese data from 2001 to 2003, document a continuous relation between audit
firm size (measured either by total assets audited, total sales audited, or total audit fees)
and the issuance of modified opinions. The authors’ results suggest that the positive
audit firm size effect is not specific to audit markets that are dominated by a few large
audit firms (such as Big 4 auditors). They conclude that increasing concentration of the
audit market represents a positive development in emerging markets.
Using a sample of audit firm mergers in China’s audit market during 1999 and 2006,
Chan and Wu (2008) examine the change in auditor independence (measured by the
frequency of modified audit opinions, MAOs) following audit firm mergers as a result of
a change in aggregate audit firm quasi-rents (DeAngelo, 1981) that are exposed to risk
(ie, quasi-rents at stake). The exogenous nature of the audit firm merger setting suggests
that their study has fewer potential confounding effects of auditor competence, audit
firm brand name, and the self-selection problem than may exist in previous studies. The
authors hypothesize that auditors become more independent in the post-merger period
only if the mergers increase their aggregate quasi-rents at stake. Separating tests for two
types of audit firm mergers in China (the first one with an increase in aggregate quasi-
rents at stake and the second type with little change in quasi-rents at stake), the authors
observe more MAOs after mergers, but only for the first type of merger. Moreover,
within the first type of mergers, the post-merger increase in the propensity of MAOs is
 China-Related Research in Auditing:
A Review and Directions for Future Research 15

positively associated with the magnitude of the expected change in aggregate quasi-rents
at stake. The authors’ findings are consistent with the notion that auditor independence
is a positive function of aggregate auditor quasi-rents at stake.

The Impact of Modified Audit Opinions on the Timing of Earnings Announcements

Using data during 1995-1999, Haw, Park, Qi and Wu (2003) examine the impact of
auditor reporting on the corporate financial reporting process in China. Consistent with
prior literature, they find that modified audit opinions delay the announcements of both
positive and negative earnings surprises. They also document a significant interaction
effect between audit opinions and earnings surprises, ie, positive earnings surprises with
modified audit opinions are announced significantly later than unqualified negative
earnings surprises.

9. Audit Pricing

Chinese listed companies have been required to publicly disclose audit fees since
their 2001 annual reports. Given that audit pricing studies have been much developed
for many years and in many countries since Simunic (1980), and audit fee data in the
US have also been available to researchers since 2001, we cannot find in established
international accounting journals simple replications of audit pricing models using
Chinese stock market data. However, we do find that a limited number of extant China-
related audit pricing studies take advantage of unique institutional settings in China.
In addition to a statutory audit, Chinese companies with foreign investments (B-share
companies) are required to undergo a supplementary audit. Although the Big 4 have
a reputation for high-quality audits in both statutory and supplementary markets,
the degree of competition in the two markets is very different. Taking advantage of
this unique binary structure of the audit market, Chen, Su and Wu (2007) compare
the pricing practices of the Big 4 in the competitive statutory market and the less
competitive supplementary market. Using audit fee data during 2000 and 2003, they
find that the Big 4 earn a significant fee premium in the less competitive supplementary
market, but not in the competitive statutory market. They suggest that the Big 4 audit
fee premium is more likely to be attributable to their dominant market position than
to their reputation in the emerging Chinese markets, in which the usual audit-quality
benefits for investors and managers are either absent or minimal.
Using more recent Chinese B-share audit market data (ie, during 2005 and 2006),
Wang, O and Iqbal (2009) find that the Big 4 earn audit fee premiums both in statutory
and supplementary markets, which is inconsistent with Chen, Su and Wu (2007) who
document a Big 4 audit fee premium only in the supplementary market but not in the
statutory market. The authors attribute the different findings as likely being caused
by the market movement towards high quality audit firms despite the fact they charge
16 Dan A. Simunic and Xi Wu

higher prices. They also document that both industry specialized and non-specialist Big 4
auditors earn fee premiums in both statutory and supplementary markets, while industry
specialized Big 4 auditors earn additional fee premiums in the statutory market but not
in the supplementary market as compared to non-specialist Big 4 firms. Finally, they
find that second tier auditors (ie, BDO and Horwath) do not earn fee premiums either
from reputation or industry specialization. A concern with this study is that the industry
expertise of auditors is measured only within the portfolio of B-share companies, while
the actual development of audit firm industry specialization arises from the larger client
portfolio that is not confined to this market segment.

10. Auditor Legal Liability and Regulatory Sanctions

Although it is a crucial issue, there have been few published studies regarding auditor
legal liability in the emerging Chinese market. Among the few such papers, Firth,
Mo and Wong (2005a) analyze enforcement actions issued by the China Securities
Regulatory Commission against auditors in 72 fraudulent financial reporting cases
involving listed companies in China during 1996 and 2002. The authors find that
auditors are more likely to be sanctioned by the regulators for failing to detect and report
material misstatement frauds, rather than disclosure frauds. Further analysis of the
material misstatements indicates that auditors are more likely to be sanctioned for failing
to detect and report revenue-related frauds rather than asset-related frauds. Their results
suggest that Chinese regulators believe auditors have the responsibility to detect and
report frauds that are egregious in nature, transaction-based, and related to accounting
earnings.

11. Users’ Responses to Auditing and Auditor Information

Users’ Response to Modified Audit Opinions

Chen, Su and Zhao (2000) examine the market reaction to the initial announcement
of modified audit opinions (MAOs) by companies listed on the Shanghai Stock
Exchange over a three-year period (1995-97) and provide empirical evidence of the
economic impact of auditors’ reports in the Chinese emerging market. After controlling
for the effect of changes in accounting earnings and other concurrent announcements,
the authors find: (1) MAOs are associated with significantly negative market returns,
and investors do not show a negative market reaction to MAOs until the second year;
(2) no difference in market reaction between GAAP- and non-GAAP-related MAOs
is observed; and (3) no difference in market reaction between a qualified opinion and
an unqualified opinion with explanatory notes is observed either. They conclude that
auditor reports have value relevance and that independent auditing as an institution
 China-Related Research in Auditing:
A Review and Directions for Future Research 17

plays an important role in the emerging Chinese stock market.

Lin, Tang and Xiao (2003) experimentally explore users’ responses to the qualification
of audit reports in China. By employing the type of audit report (eg, unqualified vs.
qualified auditor opinion) as a manipulated variable in the experiment, they find mixed
responses from the participants (comprising 215 part-time Executive MBA students)
towards the perceived impact of a qualified audit report on users’ understanding and
use of the financial statements. In general, Chinese users, credit and loan officers in
particular, perceived a qualified auditor opinion as having a somewhat negative impact
on the credibility of financial statements. However, they find no significant difference
in users’ investment or credit decisions between an unqualified-opinion and a qualified-
opinion financial statement. Their findings suggest that the US-style qualified audit
reports have fairly limited ‘information content’ to users in the (then) Chinese auditing
environment.

Market Response to Higher Quality Auditors

Gul, Sun and Tsui (2003) investigate whether the higher quality (top-ten) auditors
in the Shanghai Stock Exchange affect the positive association between a change in
earnings per share and cumulative abnormal return (CAR). Using the data for 659
listed companies during 1996 and 1997, they find that the positive market reaction to
a reported increase in earnings is stronger for firms audited by high quality auditors.
The authors conclude that audit quality is playing an important role in China, and that
investors in the Shanghai market differentiate between high quality versus lower quality
auditors.
Using a more recent and broader set of data (3587 A-share company observations
during 2002 and 2004), Lin, Liu and Wang (2009) also find that larger (ie, top-ten)
audit firms have a positive (negative) impact on earnings response coefficients (ERCs) for
firms with positive (negative) abnormal earnings. In addition, they find that switching to
a larger (smaller) auditor has a positive (negative) impact on ERCs for firms with positive
abnormal earnings. Similarly, for firms with negative abnormal earnings, switching to
a larger (smaller) auditor has an alleviating (exacerbating) impact on ERCs. Consistent
with Gul, Sun and Tsui (2003), their findings suggest that higher quality auditors are
differentiated by investors in the Chinese stock market.

Expectation Gap between Auditors and Users

The audit ‘expectation gap’ is an important issue associated with the independent
auditing function and has significant implications on the development of auditing
standards and practices. Through a questionnaire survey (with 198 usable responses),
Lin and Chen (2004) find a rising ‘expectation gap’ with respect to audit objectives,
auditor’s obligation to detect frauds, third-party liability of auditors, and the impact of
government sponsorship on the credibility of audit services.
18 Dan A. Simunic and Xi Wu

12. Cultural and Ethical Perspectives on Auditing

Cultural Influence on the Demand for Accounting Control

Firms expend costly resources on audit-based monitoring schemes to improve

interdivisional coordination. Kachelmeier and Shehata (1997) investigate the premise
that the effectiveness of and demand for audit-based monitoring may be sensitive to
societal factors. Although viewing their study more as a general investigation of cross-
cultural accounting control issues than as a specific study of Canada, Hong Kong, and
the PR China, they use experimental data from China (and Hong Kong as well) as the
jurisdiction with high collectivist orientation, whereas they use data from Canada as
being a country with a high individualism orientation. They find that when the internal
information system aggregates decisions and ensures anonymity, choice patterns among
the three countries are similar. But when decisions are not anonymous, there is a much
higher degree of group cooperation and a lower demand for auditing in Hong Kong and
the PRC than in Canada.

Cultural Influence on the Magnitude of Accounting Errors

Based on the accounting errors detected in 80 foreign enterprises of different cultures

operating in China, Chan, Lin and Mo (2003) examine the impact of different cultural
dimensions (ie, power distance and individualism) on audit-detected accounting
errors. They find that both large power distance and individualism are significantly
and positively associated with the magnitude of errors. Their findings are useful to
alert auditors to be aware of large power distance enterprises (eg, with centralization
of power in a few individuals, management override of controls, and less competent
personnel), and of enterprises from an individualist culture (eg, those characterized by
higher personnel turnover and more reliance on accounting numbers for individual
performance evaluation).

Cultural Influence on (Perceived) Auditors’ Ability to Resist Client Pressure

Based on a sample of 93 auditors from China and the United Kingdom (UK), Lin and
Fraser (2008) experimentally examine the effect of specificity of accounting standards, level
of auditor tenure, provision of management advisory services (MAS), and degree of audit
market competition on perceptions of auditors’ ability to withstand client pressure in audit
conflict situations. They expect auditors in low power distance and high individualism
cultures (like the UK) to be more resistant to client pressure than their peers in cultures
characterized by high power distance and low individualism (like China). Consistent with
the expectation, they find that UK auditors perceive specificity of accounting standards,
auditor tenure, MAS, and competition as less likely to affect decisions as to whether or not
to accept clients’ preferred accounting treatments than do their Chinese counterparts.
 China-Related Research in Auditing:
A Review and Directions for Future Research 19

The Impact of Ethical Culture on Auditor’s Ethical Judgment and Behavior

Shafer (2008) conducts a questionnaire survey (with 128 usable responses) to

examine the ethical culture or climate in Chinese CPA firms. The author finds that
compared with auditors employed by international firms, auditors employed by local
firms judged questionable actions as more ethical and indicated a higher likelihood of
committing similar actions. He also finds that perceptions of the ethical climate in one’s
organization, has a significant effect on intentions to commit ethically questionable acts.

13. Audit Committees

Chinese regulators have introduced the independent director system and audit
committees (ACs) to listed companies since 2002 in order to improve corporate
governance and promote stock market reform in China.
Chambers (2005) compares the practice, rules, and enforcement of audit committees
between UK and China. He finds that the responsibilities of audit committees in the
UK and China are broadly similar, though UK guidance gives their audit committees
a bigger role with respect to risk management and operational control. As to the
compliance of corporate governance guidance, the UK is more market driven, whereas
China is characterized by regulatory enforcement. Another difference is a requirement
for a majority of audit committee members to be independent in China as compared
with a requirement for all committee members to be independent in the UK.
Lin, Xiao and Tang (2008) conduct a questionnaire survey (with 259 usable
responses) to investigate the perceptions of the roles, responsibilities and basic
characteristics of audit committees (ACs) in the current business environment in China,
from the perspectives of investors/creditors, independent directors (AC members),
company officers and external auditors. They find that various groups of stakeholders
have generally accepted the ceremonial roles and responsibilities of ACs in terms of
lifting the image of good corporate governance, enhancing communication between
the board of directors and auditors, and mediating conflict between management
and auditors. However, the more concrete AC oversight roles and responsibilities for
improving internal control, rules compliance, sound corporate financial reporting and
auditing processes have not been fully recognized at present, particularly by company
management and independent directors. In addition, the study reveals that actual AC
operations in practice are ineffective even though a large portion of Chinese listed
companies have set up ACs.
20 Dan A. Simunic and Xi Wu

14. Summary of Existing Research

As shown by this overview, the existing body of Chinese auditing research is both
large and varied. Influenced strongly by both local regulators and international investors
and practitioners, the current auditing environment in China reflects factors that are
both unique to China and common to international practice. Besides early studies whose
main purpose was to increase our knowledge about the development of the Chinese
auditing profession, many more recent publications contribute to the auditing literature
in a more general way. A variety of topics and issues raised in early research agendas and
frameworks (eg, Graham, 1996; Wallace, 2000) have been addressed by subsequent
studies, and many unique institutional factors (such as political and governmental
impact on auditor choice and auditor practices, and an evolving audit market with many
audit firm mergers) have been incorporated into existing studies. Empirical analyses of
archival data, and questionnaire surveys, are the major methodologies that have been
used by researchers of China-related auditing issues. However, behavioral experimental
and analytical modeling studies as suggested by Trotman (1999) and Chen and Schipper
(2008) are very scarce. While further studies on China-related auditing issues are
warranted, the question remains as to how researchers might best proceed, the topic to
which we now turn.

15. Some Directions for Future Research

Targeting research using archival, questionnaire, or laboratory-created data from
one country to a broader audience of academic journals and readers in other countries
presents both unique opportunities and challenges. Obviously, the paper itself should
be well-crafted at a technical level, but – to be publishable in a major journal – the
paper should also be interesting and relevant to a broader audience. The general strategy
for doing this is to find interesting issues, address a research question that is difficult
or impossible to answer using data readily available in other countries, and to exploit
institutional features of the local (here Chinese environment) that are different from
other countries but where other factors are sufficiently similar so as to avoid massive
ceteris paribus problems. The paper by Chen, Su, and Zhao (2000) described earlier is
a good example of the successful application of this research strategy. Here the authors
examined the impact of audit opinions modified because of client GAAP violations
on share prices of securities listed on the Shanghai Stock Exchange. The basic research
question – do GAAP opinion qualifications matter to investors – is certainly interesting
and could not be addressed in the US (or in most other countries) because securities
regulators normally do not allow companies to file financial statements that do not
conform with GAAP. Indeed the Shanghai Exchange has since changed its own rules to
preclude such filings. To be a successful test of the impact of qualified audit opinions
on share prices, the authors also had to assume that auditors in China were credible and
 China-Related Research in Auditing:
A Review and Directions for Future Research 21

that the Shanghai Stock Exchange was informationally efficient to a reasonable degree.
If there were major ceteris paribus problems – for example, the Shanghai Exchange was
not informationally efficient or if Chinese audits lacked basic credibility with investors –
then the hypothesis test could not have been performed. Rather, the research would have
been seen as purely descriptive of an unusual environment, and much more difficult to
publish in a major international journal.
We believe that there are a number of other topics in auditing that could exploit
this general research strategy. For example, a Chinese auditor’s legal liability to investors
is quite limited. How does this fact affect the level of auditor effort and audit fees in
the Chinese environment relative to countries where legal liability is more stringent?
As another example, the quality distinction between Big 4 and non-Big 4 audits is well
established in the international auditing literature. However, in China the market share
of the Big 4 firms is quite low. This raises the question of what factors determine audit
quality differences (if any) among the large set of audits performed by non-Big 4 firms?
This interesting issue has already been pursued by Chinese researchers documenting the
importance of the distinction (for example) between local non-Big 4 firms and non-
local, non-Big 4 firms. More research on the determinants of audit quality differences
among non-Big 4 audit firms would help us understand the nature of audit markets in
the many other countries – not just China – where Big 4 market dominance is limited.
Another issue that seems worth investigating is the nature of financial reporting fraud
and the factors that increase the likelihood of such fraud in China. While fraudulent
financial reporting has been studied using US data, the sample firms are identified
through SEC sanctions and are limited in number. A larger, non-US based sample would
help us to better understand this interesting and important issue.
To conclude, we believe that there is no shortage of topics for interesting research on
auditing in China. As the Chinese economy continues to grow in global importance, we
expect that issues related to the development of this economy – including the evolution
of financial reporting and audits of financial statements – will be of considerable interest
to international accounting journals and their readers.

References

Blackwell, D. W., Noland, T. R., Winters, D. B., 1998. The value of auditor assurance: Evidence from loan
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Blouin, J., Grein, B., Roundtree, B., 2007. An analysis of forced auditor change: The case of former Arthur
Andersen clients. The Accounting Review 82 (3), 621-650.
Carey, P., Simnett, R., Tanewski, G., 2000. Voluntary demand for internal and external auditing by family
businesses. Auditing: A Journal of Practice and Theory 19 (Suppl.), 37-51.
Chan, K. H., Chow, L., 1997. An empirical study of tax audits in China on international transfer pricing.
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Chan, K. H., Mo, P. L. L., 2000. Tax holidays and tax noncompliance: An empirical study of corporate tax
audits in China’s developing economy. The Accounting Review 75 (4), 469-484.
22 Dan A. Simunic and Xi Wu

Chan, K. H., Mo, P. L. L., 2002. The impact of firm characteristics on book-tax-conforming and book-tax-
difference audit adjustments. The Journal of the American Taxation Association 24 (2), 18-34.
Chan, K. H., Wu, D., 2008. Aggregate quasi rents and auditor independence: Evidence from audit firm
mergers in China. Working Paper, Lingnan University and Hong Kong Polytechnic University.
Chen, C. J. P., Su, X., Wu, X., 2009. Forced audit firm change, continued partner-client relationship, and
financial reporting quality. Auditing: A Journal of Practice and Theory 28 (2), 227-246.
Chen, C. J. P., Su, X., Wu, X., 2010. Auditor changes following a Big 4 merger with a local Chinese firm: A
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Chen, Q., Schipper, K., 2008. Future directions for Chinese accounting research. China Journal of
Accounting Research 1 (1), 1-10.
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Chow, C. W., 1982. The demand for external auditing: Size, debt and ownership influences. The Accounting
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analysis of enforcement actions in China. Journal of Business Ethics 62, 367-381.
Firth, M., Mo, P. L. L., Wong, R. M. K., 2005b. An empirical examination of the legal form of CPA
firms and auditors’ reporting conservatism. Working Paper, Hong Kong Polytechnic University and
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Li, S., Wu, X., 2009. A list of China-related publications in international accounting and finance journals.
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later. Journal of Accounting Literature 16, 86-126.
Simnett, R., Sylph, J. M., 2006. Update of the IAASB’s activities 2005. The Auditor’s Report 29 (2). http://
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Tang Y. W., 1999. Issues in the development of the accounting profession in China. China Accounting and
Finance Review 1 (1), 21-36.
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Accounting and Finance Review 1 (1), 49-64.
Wallace W. A., 2000. Identifying research questions on regulation and the accounting profession in China.
China Accounting and Finance Review 2 (2), 20-46.

Appendix A: A List of International Accounting Journals That Were Searched for Publications on
China-Related Auditing Issues
Abacus
Accounting and Business Research
Accounting and Finance
Accounting, Auditing and Accountability Journal
Accounting Horizons
Accounting, Organizations and Society
Advances in International Accounting
Asia-Pacific Journal of Accounting and Economics
Auditing: A Journal of Practice and Theory
Behavioral Research in Accounting
Contemporary Accounting Research
 China-Related Research in Auditing:
A Review and Directions for Future Research 23

Corporate Governance: An International Review

Critical Perspectives on Accounting
European Accounting Review
International Journal of Auditing
Journal of Accounting and Economics
Journal of Accounting and Public Policy
Journal of Accounting, Auditing and Finance
Journal of Accounting Literature
Journal of Accounting Research
Journal of Business Finance and Accounting
Journal of Information Systems
Journal of International Accounting, Auditing and Taxation
Journal of International Accounting Research
Journal of International Financial Management and Accounting
Journal of Management Accounting Research
Management Accounting Research
Review of Accounting Studies
Review of Quantitative Finance and Accounting
The Accounting Review
The British Accounting Review
The International Journal of Accounting
The Journal of the American Taxation Association

Appendix B: Chronicle of International Publications on China-Related Auditing Issues

Year 1996
Graham, Lynford E. 1996. Setting a research agenda for auditing issues in the People’s Republic of
China. The International Journal of Accounting 31 (1): 19-37.
Year 1997
Kachelmeier, Steven J. and Mohamed Shehata. 1997. Internal Auditing and Voluntary Cooperation in
Firms: A Cross-Cultural Experiment. The Accounting Review 72 (3): 407-431.
Year 1999
Hao, Zhen Ping. 1999. Regulation and organisation of accountants in China. Accounting, Auditing and
Accountability Journal 12 (3): 286-302.
Tang, Qingliang, Chee W. Chow, and Amy Lau. 1999. Auditing of state-owned enterprises in China:
historic development, current practice and emerging issues. The International Journal of Accounting 34 (2):
173-187.
Year 2000
Chen, Charles J. P., Xijia Su, and Ronald Zhao. 2000. An emerging market’s reaction to initial modified
audit opinions: Evidence from the Shanghai Stock Exchange. Contemporary Accounting Research 17 (3): 429-
455.
DeFond, Mark L., T. J. Wong, and Shuhua Li. 2000. The impact of improved auditor independence on
audit market concentration in China. Journal of Accounting and Economics 28 (3): 269-305.
Lin, Kenny Z. and K. Hung Chan. 2000. Auditing Standards in China: A comparative analysis with
relevant International Standards and Guidelines. The International Journal of Accounting 35 (4): 559-577.
Xiao, Jason Zezhong, Yikuan Zhang, and Zhihua Xie. 2000. The making of Independent Auditing
Standards in China. Accounting Horizons 14 (1): 69-89.
Year 2001
Chen, Charles J. P., Shimin Chen, and Xijia Su. 2001. Profitability regulation, earnings management,
and modified audit opinions: Evidence from China. Auditing: A Journal of Practice and Theory 20 (2): 9-30.
24 Dan A. Simunic and Xi Wu

Chen, Charles J. P., Anamitra Shome, and Xijia Su. 2001. How is audit quality perceived by Big 5 and
local auditors in China? A preliminary investigation. International Journal of Auditing 5 (2): 157-175.
Davidson, Ronald A. and Stanley Chang. 2001. The importance of auditing topics to Chinese auditors.
International Journal of Auditing 5 (2): 127-139.
Yang, Lloyd, Qingliang Tang, Alan Kilgore, and Yi Hong Jiang. 2001. Auditor-government associations
and auditor independence in China. The British Accounting Review 33 (2): 175-189.
Year 2003
Chan, K. Hung, Kenny Z. Lin, and Phyllis Lai-lan Mo. 2003. An empirical study on the impact of
culture on audit-detected accounting errors. Auditing: A Journal of Practice and Theory 22 (2): 281-295.
Gul, Ferdinand A., Sunny Y. J. Sun and Judy S. L. Tsui. 2003. Audit quality, earnings, and the Shanghai
Stock Market reaction. Journal of Accounting, Auditing and Finance 18 (3): 411-427.
Haw, In-Mu, Kyungjoo Park, Daqing Qi, and Woody Wu. 2003. Audit qualifications and timing of
earnings announcements: Evidence from China. Auditing: A Journal of Practice and Theory 22 (2): 121-146.
Lin, Z. Jun, Qingliang Tang, and Jason Xiao. 2003. An experimental study of users’ responses to
qualified audit reports in China. Journal of International Accounting, Auditing and Taxation 12 (1): 1-22.
Year 2004
Lin, Z. Jun, and Feng Chen. 2004. An empirical study of audit ‘Expectation Gap’ in the People’s
Republic of China. International Journal of Auditing 8 (2): 93-115.
Year 2005
Chambers, Andrew D. 2005. Audit Committees: practice, rules and enforcement in the UK and China.
Corporate Governance: An International Review 13 (1): 92-100.
Chen, Shimin, Xijia Su, and Zhenglin Wang. 2005. An analysis of auditing environment and modified
audit opinions in China: Underlying reasons and lesson. International Journal of Auditing 9 (3): 165-185.
Year 2006
Chan, K. Hung, Kenny Z. Lin, and Phyllis Lai-lan Mo. 2006. A political-economic analysis of auditor
reporting and auditor switches. Review of Accounting Studies 11 (1): 21-48.
Chow, Chee W., Joanna L. Ho, and Phyllis Lai Lan Mo. 2006. Toward understanding Chinese auditors’
structuring of audit approaches, client acceptance decisions, risk assessment, and stringency of imposed
reporting standards. Journal of International Accounting Research 5 (1): 1-23.
Year 2007
Chan, K. Hung, Kenny Z. Lin, and Fang Zhang. 2007. On the association between changes in
corporate ownership and changes in auditor quality in a transitional economy. Journal of International
Accounting Research 6 (1): 19-36.
Chen, Charles J. P., Xijia Su, and Xi Wu. 2007. Market competitiveness and Big 5 pricing: Evidence
from China’s binary market. The International Journal of Accounting 42 (1): 1-24.
Firth, Michael, Peter M.Y. Fung, and Oliver M. Rui. 2007. Ownership, two-tier board structure, and
the informativeness of earnings– Evidence from China. Journal of Accounting and Public Policy 26 (4): 463-
496.
Zhou, Haiyan. 2007. Auditing standards, increased accounting disclosure, and information asymmetry:
Evidence from an emerging market. Journal of Accounting and Public Policy 26 (5): 584-620.
Year 2008
Li, Chuntao, Frank M. Song, and Sonia M. L. Wong. 2008. A continuous relation between audit firm
size and audit opinions: Evidence from China. International Journal of Auditing 12 (2): 111-127.
Haw, I. 2008. Discussant comments for “Do auditing standards improve the accounting disclosure
and information environment of public companies? Evidence from the emerging markets in China”. The
International Journal of Accounting 43 (2): 170-177.
Haw, I., D. Qi, and W. Wu. 2008. The economic consequence of voluntary auditing. Journal of
Accounting, Auditing and Finance 23 (1): 63-93.
Lin, Kenny Z. and Ian A. M. Fraser. 2008. Auditors’ ability to resist client pressure and culture:
Perceptions in China and the United Kingdom. Journal of International Financial Management and
 China-Related Research in Auditing:
A Review and Directions for Future Research 25

Accounting 19 (2): 161-183.

Lin, Z. Jun, Jason Z. Xiao, and Qingliang Tang. 2008. The roles, responsibilities and characteristics of
audit committee in China. Accounting, Auditing and Accountability Journal 21 (5): 721-751.
Sami, Heibatollah and Haiyan Zhou. 2008a. Do auditing standards improve the accounting disclosure
and information environment of public companies? Evidence from the emerging markets in China. The
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Shafer, William E. 2008. Ethical climate in Chinese CPA firms. Accounting, Organizations and Society
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Ting, Wei, Sin-Hui Yen, and Chien-Liang Chiu. 2008. The influence of qualified foreign institutional
investors on the association between default risk and audit opinions: Evidence from the Chinese stock
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Year 2009
Gul, Ferdinand A., Heibatollah Sami, and Haiyan Zhou. 2009. Auditor disaffiliation program in China
and auditor independence. Auditing: A Journal of Practice and Theory 28 (1): 29-52.
Lin, Z. Jun and Ming Liu. 2009. The impact of corporate governance on auditor choice: Evidence from
China. Journal of International Accounting, Auditing and Taxation 18 (1): 44-59.
Lin, Z. Jun, Ming Liu, and Zhemin Wang. 2009. Market implications of the audit quality and auditor
switches: Evidence from China. Journal of International Financial Management and Accounting 20 (1): 35-
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Wang, Kun, Sewon O, and Zahid Iqbal. 2009. Audit pricing and auditor industry specialization in an
emerging market: Evidence from China. Journal of International Accounting, Auditing and Taxation 18 (1):
60-72.
Yee, Helen. 2009. The re-emergence of the public accounting profession in China: A hegemonic
analysis. Critical Perspectives on Accounting 20 (1): 71-92.