The impact of guanxi on auditor independence: Perceptions of auditors and CFOs in Hong Kong

Abstract

Auditor independence has long been referred to as the cornerstone of the auditing profession. Guanxi refers to the networks of informal relationships and exchanges of favors that dominate all business and social activities that occur throughout China. This research will analyse the impact of guanxi and client size on the perceived independence of auditors in the setting of Hong Kong. Survey data is obtained from 524 questionnaire responses from Chief Financial Officers (CFOs), Big 4 and Non-Big 4 auditors. Two within-subjects independent variables: “guanxi” and the “client size”, and one between-subject independent variable: auditors versus CFOs, are employed. Results indicate guanxi is a significant factor influencing perceived auditor independence in Chinese society, which has largely been neglected in the accounting literature. Independence is severely impaired when the duration of guanxi with clients reaches five years or more. Large client size has a negative influence on the perceived independence of auditors and this result contradicts an earlier U.S. study. The results indicate that the longer the guanxi when the auditor is associated a with large audit client, the greater the decrease in their perceived independence and this has implications for audit legislation. CFOs generate the lowest mean scores (greatest threat to auditor independence) for the perceived effects of all levels (durations) of guanxi among the three groups. This result supports the stewardship theory that asserts stewards (CFOs) motives are aligned with the objectives of their principals. CFOs consider the increasing levels of guanxi associated with the auditors are not in the best interests of their principals, and hence affect the reliability of the audited accounts. Though this study is conducted in the Asia Pacific region, western counterparts will find the results useful. Multinational corporations which have subsidiaries or headquarters established globally, should be aware that guanxi has implications for their Asian operations and their consolidated audited accounts. In view of the critical importance of the guanxi factor on the perceived auditor independence, standard setters in this region should consider devising ethical guidelines requiring mandatory rotation of public accounting firms.