Client exposure to random inspection and auditor responses: evidence from China

Information from the abstract

This study examines whether client exposure to the China Securities Regulatory Commission’s random-inspection program is associated with auditor-reporting and financial-reporting outcomes. Using Chinese listed-firm data from 2012 to 2023 and a staggered difference-in-differences framework, this study finds that post-inspection exposure is associated with a higher likelihood of modified audit opinions and lower signed discretionary accruals. Modified audit opinions are interpreted as a relatively direct auditor-reporting outcome, whereas signed discretionary accruals are treated as a complementary financial-reporting outcome that may reflect managerial reporting choices, reporting conservatism, auditor constraints, or their interaction. An analysis of absolute discretionary accruals does not indicate a reduction in the overall magnitude of abnormal accruals. An anticipation test finds no significant one-year lead for modified audit opinions but shows that signed discretionary accruals had already declined in the year immediately preceding the first disclosed inspection, warranting caution in interpreting the accrual result. Further analyses show that inspection exposure is associated with higher audit fees but not with significantly longer audit-report lags or a higher probability of audit-firm turnover. Overall, the findings are interpreted as conditional post-inspection associations rather than unconditional causal effects.

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Related topics: Auditing, Earnings Management, Governance · Corporate Governance and Financial Management · Financial Reporting and XBRL