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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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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DOI: https://doi.org/10.1007/s10551-011-0804-2