Auditors' Reporting Conservatism after Regulatory Sanctions: Evidence from China

Abstract

ABSTRACT This study examines whether regulatory sanctions have a disciplinary effect on auditors in a large emerging market. Based on the enforcement releases issued by the China Securities Regulatory Commission (CSRC) during 1996–2007, we hypothesize and find that auditors who are sanctioned for failure to detect and report financial statement fraud report more conservatively after the sanction. Our empirical findings specifically suggest that sanctioned auditors issue more going-concern opinions for risky clients after enforcement action than they did before the enforcement action. In contrast, we find no such effect for non-risky clients. Overall, we provide evidence that regulatory sanctions are effective in shaping auditors' behavior when they audit risky clients. JEL Classifications: G18; K42; M42.