AAA Spark Meeting of Regions

Auditors’ Responses to Foreign Information Barriers: Evidence from the Google Blockade in China

• In Event: Auditor Tasks and Advising the Client

Abstract

We use the blockade of Google’s search service in mainland China starting in 2010 as an exogenous shock to the foreign information acquisition and verification costs for external auditors. While restricted access to foreign information increases audit risk, it is ex-ante unclear whether auditors correspondingly adjust their audit efforts and judgments in an institutional environment characterized by the lax rule of law and weak investor protection. Using the difference-in-differences method in a sample of Chinese public nonfinancial companies during 2006-2015, we identify companies with (without) international operations as the treatment (control) group. We find that the blockade of Google leads to significantly higher audit fees for client companies with international operations. Auditors also respond to the Google blockade by increasing audit efforts and making more audit adjustments to clients with international operations. The observed effects are more pronounced for auditors with international alliances and strong quality control, and for clients with foreign institutional investors. Overall, we conclude that Chinese auditors comply with professional standards in their response to higher information verification costs and higher financial misstatement risk.

Authors

• Xingqiang Du, Xiamen University

• Wanfu Li, Nanjing University of Finance and Economics

• Feng Chen, University of Toronto - Rotman School of Managemen

• Jianguang Zeng, Chongqing University