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Auditors' Going Concern Reporting in the Pre- and Post-Bankruptcy Law Eras: Chinese Affiliates of Big 4 versus Local Auditors

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Abstract

Unlike the situation in most developed countries, before the enactment of China's 2006 Bankruptcy Law it was difficult for Chinese-listed companies, which were mostly government owned, to declare bankruptcy. Our analysis of a sample of Chinese financially-distressed companies from 2001 to 2010 reveals that the Chinese affiliates of Big 4 auditors had a higher propensity to issue going concern (GC) reports than local auditors not only in the post-law period, but also in the pre-law period. This finding suggests that Big 4 auditors had incentives to maintain their reputations even when the clients' bankruptcy risk was low. We also find that there was a significant increase in local top-10 auditors' GC reporting propensity in the post-law period, which is consistent with the notion that the increased litigation/regulation risk due to the enactment of Bankruptcy Law has an effect on local large auditors.

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Finance and Accounting


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Source

The International Journal of Accounting

ISSN:0020-7063

Year:2015

Issue:1

Volume:50

Page:1-30

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