Capital verification and auditor liability: Evidence from china

Yingfa Lu, Falconer Mitchell, Christopher Kam Man Pong

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Purpose – This paper aims to examine the different perspectives of auditors and non-auditors on this question, along with the rationale and impact of these differences. Chinese company law requires an audit report on paid-up capital when business entities are newly formed or their capital altered, which raises questions regarding the liability of auditors should the business entities fail. Design/methodology/approach – Interviews and a questionnaire survey were conducted to analyse how legislation can impact on interested parties in a relatively immature audit environment. The theories of social construction of reality and symbolic interactionism are used as a basis for explaining the different conceptions of capital verification held by interested parties. Findings – There is a mismatch between the purpose of capital verification and the functions of paid-up capital. Paid-up capital is not a reliable indicator of business liquidity and creditworthiness. Auditors and non-auditors have different understandings about the assurance provided by paid-up capital at the point of company formation or auditing field work, and at the point of actual trading after the company formation or auditing field work. They also differ on the causation between deficient capital verification reports and trading loss. The liability crisis adversely influenced auditors’ perception of the capital verification service, although it did not lead to outright rejection by them. Originality/value – This paper describes an important compliance auditing service in China. By conducting an analysis of the conflicting views of auditors and non-auditors on capital verification, it contributes to the existing literature on the sources of disputes between auditors and other stakeholders, and the efforts to establish a balanced auditor liability regime.

Original languageEnglish
Pages (from-to)657-680
Number of pages24
JournalManagerial Auditing Journal
Volume30
Issue number6-7
DOIs
Publication statusPublished - 6 Jul 2015

Keywords

  • Auditor liability
  • Capital registration
  • China
  • Regulation

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics, Econometrics and Finance(all)
  • Organizational Behavior and Human Resource Management

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