Abstract
As a consequence of a large-scale accounting fraud, China implemented a dual audit system for listed companies issuing foreign stocks (B shares and H shares) from 2001 to 2006, before adopting Chinese-IFRS in 2007. At the end of 2010, the EU proposed that listed corporations over a certain size should be required to implement a joint audit system. However, only a few countries have implemented this system, and thus, data and references are extremely limited. The dual audit system is called the “twin” of the joint audit system. We analyze whether the dual system improves a company’s earnings quality. Earnings quality is studied by means of real earnings management, and the variable of loss aversion. We find that real earnings management of dual audited enterprises is lower than that of single audited (A-share) enterprises, and the inclination toward loss aversion of enterprises in the foreign share market has not increased significantly relative to the A-share enterprises after the abolition of the dual audit system. The results indicate that a dual audit system improves earnings quality. We expect that the conclusions of this research will resolve the issues and concerns about the joint audit system.
Highlights
Improving accounting transparency in the capital markets has long been one of the major concerns of regulatory agencies worldwide
This study verified whether a dual audit system plays a significant role in helping companies achieve sustainable growth by improving the quality of accounting information
As a result of examining whether the effect of dual auditing persists even after the end of the dual audit system, the inclination for loss avoidance of companies that experienced dual auditing did not increase compared with companies that were not subject to dual auditing
Summary
Improving accounting transparency in the capital markets has long been one of the major concerns of regulatory agencies worldwide. A joint audit system was put into trial use in countries such as Canada, Denmark, and Sweden, but is currently only implemented by France for listed companies of a specific size. The draft required that listed companies with more than 100 million Euros in assets hire two accounting firms to participate in a joint audit of the company’s financial statements, and that at least one of the accounting firms be a non-Big Four firm. The joint audit approach, as advocated by the EU, has given rise to wide concerns in both academic and practical circles. If it is widely implemented by other countries, a joint audit needs to be supported by a rich theoretical basis and empirical conclusions. In 2001, the Chinese government began to require dual audits
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