The Audit Cost of Being on China’s Hurun Rich List
Research finds auditors tend to charge higher fees or use stronger language in audit opinions against clients listed on China’s rich list
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More than a century ago, the American philosopher and psychologist William James first coined the term the “bitch goddess” in reference to the downsides of material success. In modern China, fame can be a lot of things but a new study has found it could lead to higher fees or a more severe audit opinion for the companies of their newly-famous and newly-wealthy owners.
Conducted by Prof. Donghui Wu of The Chinese University of Hong Kong (CUHK) Business School’s School of Accountancy and Prof. Qing Ye of Nanjing University, the study, entitled “Public Attention and Auditor Behaviour: The Case of Hurun Rich List in China”, looked at how auditing firms reacted when the controlling owners of their clients make it to the Hurun Report’s China Rich List, a ranking of the wealthiest individuals in the country launched in 1999.
Analysing 126 public companies in China between 1999 and 2012, the study found auditors were estimated to charge around 8 percent higher in fees to compensate for the higher audit risk after an entrepreneur associated with a company becomes listed on the China Rich List.
It also found the level of severity in modified audit opinions – which are issued if auditors find questionable practices in a company’s accounting books – increased by 6.3 percent for firms whose bosses appear for the first time on what the local media have dubbed the “slaughter list” in reference to a tendency for misfortune to befall those who appear in it.
Increased Public Scrutiny