Article: Ownership structure, financial reporting fraud and audit quality: Chinese evidence Journal: International Journal of Accounting, Auditing and Performance Evaluation (IJAAPE) 2013 Vol.9 No.1 pp.75 - 99 Abstract: This paper examines two types of financial reporting fraud (i.e., earnings manipulation fraud and tunnelling fraud) and their association with ownership structure and audit quality in detecting the fraud using a sample of Chinese listed firms. We find that more concentrated ownership tends to be associated with tunnelling fraud and more dispersed ownership tends to be associated with earnings manipulation fraud. Specifically, controlling shareholders tend to over-reach minority shareholders when they become more powerful, but at the same time they tend to curb earnings manipulation fraud. The second largest shareholder is able to curb earnings manipulation fraud through monitoring the management. However, we do not find evidence that they are able to curb tunnelling fraud. We also find that although auditors in China are generally effective in detecting earnings manipulation fraud, they are not so effective in detecting tunnelling fraud. Moreover, Big4 audit firms are not significantly different from non-Big4 firms in terms of detecting frauds. These findings further our understanding of the association between ownership structure and different types of fraud. Inderscience Publishers - linking academia, business and industry through research

Title: Ownership structure, financial reporting fraud and audit quality: Chinese evidence

Authors: Yu Chen; Zabihollah Rezaee

Addresses: A.R. Sanchez, Jr. School of Business, Texas A&M International University, 5201 University Boulevard, Laredo, Texas 78041-1900, USA. ' Fogelman College of Business and Economics, The University of Memphis, Memphis, TN 38152-3120, USA

Abstract: This paper examines two types of financial reporting fraud (i.e., earnings manipulation fraud and tunnelling fraud) and their association with ownership structure and audit quality in detecting the fraud using a sample of Chinese listed firms. We find that more concentrated ownership tends to be associated with tunnelling fraud and more dispersed ownership tends to be associated with earnings manipulation fraud. Specifically, controlling shareholders tend to over-reach minority shareholders when they become more powerful, but at the same time they tend to curb earnings manipulation fraud. The second largest shareholder is able to curb earnings manipulation fraud through monitoring the management. However, we do not find evidence that they are able to curb tunnelling fraud. We also find that although auditors in China are generally effective in detecting earnings manipulation fraud, they are not so effective in detecting tunnelling fraud. Moreover, Big4 audit firms are not significantly different from non-Big4 firms in terms of detecting frauds. These findings further our understanding of the association between ownership structure and different types of fraud.

Keywords: audit quality; fraud; ownership structure; tunnelling fraud; earnings manipulation; controlling shareholders; China; financial reporting; fraud detection; concentrated ownership; dispersed ownership; minority shareholders.

DOI: 10.1504/IJAAPE.2013.050624

International Journal of Accounting, Auditing and Performance Evaluation, 2013 Vol.9 No.1, pp.75 - 99

Published online: 30 Jan 2014 *

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Title: Ownership structure, financial reporting fraud and audit quality: Chinese evidence

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