Financial Statement Frauds and Auditor Sanctions: An Analysis of Enforcement Actions in China |
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Authors: | Michael?Firth Phyllis?L?L?Mo Email author" target="_blank">Raymond?M?K?WongEmail author |
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Institution: | (1) School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hom, Hong Kong |
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Abstract: | The rising tide of corporate scandals and audit failures has shocked the public, and the integrity of auditors is being increasingly
questioned. It is crucial for auditors and regulators to understand the main causes of audit failure and devise preventive
measures accordingly. This study analyzes enforcement actions issued by the China Securities Regulatory Commission against
auditors in respect of fraudulent financial reporting committed by listed companies in China. We 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 assets-related frauds. In sum, our results suggest that regulators
believe auditors have the responsibility to detect and report frauds that are egregious, transaction-based, and related to
accounting earnings. The results contribute to our knowledge of auditors’ responsibilities for detecting frauds as perceived
by regulators. |
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Keywords: | audit failure audit quality auditor responsibility auditor sanction fraud type |
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