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Does the use of honorific appellations in audit reports connote higher financial misstatement risk? Evidence from China

Feng Chen (University of Toronto, Toronto, Canada)
Xingqiang Du (Xiamen University, Xiamen, China)
Shaojuan Lai (Xiamen National Accounting Institute, Xiamen, China)
Mary Ma (York University, Toronto, Canada)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 8 May 2018

332

Abstract

Purpose

From the sociolinguistic perspective, the purpose of this paper is to examine whether the honorific and actual-name appellations that Chinese auditors use to address clients in audit reports connote differential financial misstatement risk. Specifically, the authors hypothesize that auditors’ use of honorifics signals their inferior social status relative to their clients, thereby leading to compromised auditor independence, lower audit quality, and higher financial misstatement risk.

Design/methodology/approach

The authors use a sample of manually coded appellation data from audit reports of Chinese public firms between 2003 and 2012 to conduct the research.

Findings

The authors find significantly greater financial misstatements, both in terms of likelihoods and magnitudes, for companies addressed by honorifics than for those addressed by actual names. Moreover, compared to auditors’ consistent honorific usage, discretionary honorific usage has a stronger positive association with misstatements. The authors further show that the positive association between honorific usage and client misstatement risk weakens when the audit firm is a Top 10 accounting firms in China, is an industry specialist, is formed as a partnership, or resides in a more concentrated audit market.

Originality/value

This study contributes to the sociolinguistics literature in accounting and provides evidence supporting the reform proposed by the International Auditing and Assurance Standards Board to enhance the usefulness of audit reporting.

Keywords

Acknowledgements

The authors appreciate the comments from Anthony Chan, Jonathan Farrar, Shadi Farshadfar, Jingjing Huang, Sung Kwon, Guoping Liu, Sheldon Peng, Gary Spraakman, Shuang Xue, and participants of the 2017 Canadian Academic Accounting Association annual meeting and the seminars at Ryerson University and York University. Chen acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC). Du acknowledges financial support from National Natural Science Foundation of China (NSFC-71572162).

Citation

Chen, F., Du, X., Lai, S. and Ma, M. (2018), "Does the use of honorific appellations in audit reports connote higher financial misstatement risk? Evidence from China", Asian Review of Accounting, Vol. 26 No. 2, pp. 154-181. https://doi.org/10.1108/ARA-08-2017-0128

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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