*Do Auditors Differentiate between Chinese and Other U.S. Listed Foreign Engagements?

• In Event: Auditing in China

Abstract

Because of the negative publicity surrounding U.S. listed Chinese companies, we examine whether auditors, especially the large accounting firms, differentiate between Chinese and other foreign U.S. listed engagements. We find that the Big 4 are less likely to audit Chinese companies listed in the U.S. compared to other foreign companies. When we decompose by the type of listing (ADR versus direct listing), the Big 4 are less (more) likely to audit Chinese direct listing (ADR). Further tests indicate that the likelihood of restatements and company lawsuits are higher (lower) for Chinese direct listings (ADRs), which could be a key explanation why Big 4 are less (more) likely to be associated with Chinese direct listings (ADRs). Finally, we find that the Big 4 charge Chinese directly listed companies more because of compensation for higher risk, while they charge Chinese ADRs more because of greater audit investments. In stark contrast, for non-Big 4 audits, audit fee and audit investment differences between Chinese and non-Chinese U.S. listed companies are insignificant. Overall, our results suggest that only directly-listed Chinese companies pose added risk for the Big 4 and that they incorporate these risks in their audit planning (i.e., client selection, client retention, audit pricing and audit investments).

Authors

• Aloke Al Ghosh, Baruch College–CUNY

• Elisabeth Peltier, Concordia University