Public Attention and Auditor Behavior: The Case of Hurun Rich List in China

• Author: QING YE,DONGHUI WU
• Date: 01 June 2020
• DOI: http://doi.org/10.1111/1475-679X.12309
• Published date: 01 June 2020

DOI: 10.1111/1475-679X.12309

Journal of Accounting Research

Vol. 58 No. 3 June 2020

Printed in U.S.A.

Public Attention and Auditor

Behavior: The Case of Hurun Rich

List in China

DONGHUI WU ∗AND QING YE †

Received 8 June 2018; accepted 13 March 2020

ABSTRACT

Adverse client publicity can entail regulatory scrutiny over audited financial

statements and impose political costs on auditors. We use the changes in

client publicity caused by their controlling owners’ presence on the Hurun

Rich List (the rich listing) in China to test the hypothesis that auditor conser-

vatism increases with client publicity. Our evidence indicates auditors issue

more adverse audit opinions to clients and charge higher fees following the

rich listing events. Moreover, we observe that auditors strategically respond

to clients with different attributes—for clients whose owners accumulated

wealth in a more questionable manner, auditors choose more stringent au-

dit reporting to better defend themselves from regulatory scrutiny; for clients

without such attributes, auditors primarily rely on increasing audit fees to

∗School of Accountancy and Centre for Institutions and Governance, The Chinese Univer-

sity of Hong Kong; †Business School, Nanjing University.

Accepted by Douglas Skinner. We are thankful for the comments and suggestions pro-

vided by an anonymous reviewer, Zhaoyang Gu, Bin Ke, Zengquan Li, Hao Liu, Nancy

Su, T.J. Wong, Xi Wu, George Yang, Zhifeng Yang, Hongqi Yuan, Renji Zhang, Tianyu

Zhang, Liu Zheng, and participants of workshops organized by Huazhong University of

Science and Technology, Jinan University, Xi’an Jiaotong University, Xiamen National Ac-

counting Institute, and Xiamen University. Donghui Wu gratefully acknowledges financial

support from the National Natural Science Foundation of China (Project-ID: 71828201).

Qing Ye gratefully acknowledges the financial support from the Fundamental Research

Funds for the Central Universities (Project-ID: 010414390115). The usual disclaimer ap-

plies. An online appendix to this paper can be downloaded at http://research.chicagobooth.

edu/arc/journal-of-accounting-research/online-supplements.

777

CUniversity of Chicago on behalf of the Accounting Research Center, 2020

778 D.WU AND Q.YE

cope with any post-listing increase in audit risks. Our analyses also suggest

the impacts of rich listings tend to be concentrated among large audit firms

with stronger reputation concerns or among engagement auditors with more

conservative reporting styles. By showing how auditors manage political risks

associated with heightened public scrutiny,we contribute to both the auditing

and political cost literature.

JEL codes: D72; L82; L84; M42

Keywords: political cost; conservatism; audit opinion; audit fee

1. Introduction

“Let some people get rich first!” Deng Xiaoping’s famous pronouncement

unshackled China’s economy when he initiated the economic reform in the

early 1980s. The reform has turned an impoverished China into the world’s

largest economy on a purchasing-power-parity basis (IMF [2014]). Accom-

panying China’s economic growth, a class of super-rich entrepreneurs has

emerged. Due to the egalitarian values held by Chinese society, the rich are

generally reluctant to disclose their wealth and the “hidden rich” is a nor-

mal phenomenon in China. Since 1999, Rupert Hoogewerf has published

annual rankings, known as the Hurun Rich List (the Rich List hereafter), of

China’s wealthiest individuals. The Rich List soon grew to become an au-

thoritative source for the public to track the super-rich in China.1Exploit-

ing the inclusion of clients’ controlling owners on the Rich List,weexamine

how client publicity shapes auditor decisions.

The public accounting profession is vulnerable to highly publicized

financial-reporting failures. When the Enron scandal broke in 2001, its au-

ditor, Arthur Andersen, soon came under the spotlight. Under pressures

from the press, politicians, the public, and prosecutors, the jury of a U.S.

district court convicted Andersen of obstruction of justice for shredding

audit documents barely five months after the allegation initially surfaced

(Ball [2009]). Preceded by deficient audits in Sunbeam and Waste Manage-

ment, the conviction catalyzed the swift dissolution of the accounting giant.

Blaming auditors in crises involving accounting scandals is not unique to

the United States. In August 2001, the uncovering of an accounting scan-

dal of YinGuangXia, which the media later dubbed “the Chinese Enron,”

stirred public investors’ ire and prompted Chinese regulators to revoke the

license of its auditor, ZhongTianQin, the largest audit firm in China at that

time (Chen, Sun, and Wu [2010]). In May 2006, Japanese regulators took

the unprecedented step of suspending the operations of ChuoAoyama, a

PwC affiliate, for its role in the high-profile Kanebo fraud. Shocking the

1Gaining his reputation rapidly,Hoogewer f won the New Weekly’s“Person of the Year Award”

in 2002. In 2009, he received the Magnolia Award, the highest honor bestowed by the Shang-

hai City on foreigners. Source: https://en.wikipedia.org/wiki/Rupert˙Hoogewerf, retrieved

August 18, 2017.

PUBLIC ATTENTION AND AUDITOR BEHAVIOR 779

Japanese financial community, this action contributed to ChuoAoyama’s

eventual demise in early 2007 (Skinner and Srinivasan [2012]).

Given the severe consequences of high-profile cases, self-interested au-

ditors are expected to take actions to minimize potential losses. However,

identifying the effects of client publicity on auditors’ risk management is

challenging. Typically, client publicity evolves slowly over time, and audi-

tors simultaneously adjust their auditing strategies. We rarely observe a

large sample in which auditors strategically respond to heightened client

publicity. Several methodological issues plague the exploration of the cross-

sectional covariation between client publicity and auditor behavior. First, to

the extent that clients select the auditors that fit their needs and auditors

manage risk in client acceptance decisions (Johnson and Lys [1990], John-

stone and Bedard [2003, 2004]), selectivity may bias inferences regarding

auditor behavior and client publicity risks. Second, auditor behavior, such

as the issuance of modified audit opinions (MAOs) and auditor resigna-

tion per se, may attract media attention (e.g., Miller [2006]), resulting in

the reverse-causality problem. Finally, cross-sectional analyses suffer from

the omitted-variable problem if factors such as scandal and business failure

simultaneously affect auditor decisions and draw public attention but are

not identified and controlled by researchers.

The publication of the Rich List provides us an opportunity to observe

how increased publicity shapes auditor behavior. Publicizing the names of

the billionaires as well as the staggering wealth they have amassed, the Rich

List often subjects the newly minted wealthy and their affiliated firms to

public scrutiny.2China’s transition from a planned to a market economy

has left various institutional voids, a phenomenon also observed in Rus-

sia and other former Soviet Union countries (Levin and Satarov [2000],

Khanna, Palepu, and Bullock [2010], Browder [2015]). In such an environ-

ment, entrepreneurs may exploit rent-seeking opportunities when found-

ing and expanding their businesses. Most ordinary Chinese believe many

businesspeople become exceptionally rich because of political connections,

favoritism, and corruption (Firth et al. [2014]). The presence on the Rich

List, the foremost authority on the wealthy class in China, makes rich busi-

nesspeople more conspicuous and newsworthy. With incentives to dig up

negative news and cater to readers’ preferences, the press may uncover

the questionable and even illegal business practices of billionaires when re-

porting on how they have grown wealthy (Jensen [1979], Mullainathan and

Shleifer [2005]). Negative publicity generated by rich owners’ presence on

the Rich List can thus increase regulators’ awareness of such practices and

related accounting and auditing problems, exposing auditors to a higher

risk. Higher public visibility may also result in serious consequences for au-

ditors. Publicized scandals engender costlier damage to auditor reputation

2For instance, Yan Jiehe, a Shanghai-based construction tycoon, complained, “Before the

Rich List came out, there were 200 thousand odd entries about me on the Web. Now,there are

over 400 thousand” (China Newsweek [2006]).