This article is excerpted from the paper titled "Does CEO – Auditor Dialect Connectivity Trigger Audit Opinion Shopping? Evidence from China", which was jointly published in the Journal of Business Ethics in May 2022 by Professor Du Xingqiang, Department of Accounting, School of Management, Xiamen University/Accounting Development Research Center, Dr. Xiao Liang, Department of Accounting, School of Management, Xiamen University, and associate professor Du Yingjie, Shanghai University.
01
introduction
Under the background of asymmetric information, financial report has always been regarded as an important channel for communication between insiders and outsiders. External audit plays a vital role in ensuring the quality of financial reports to potential investors and improving the reliability of financial figures disclosed. In order to avoid the negative consequences caused by non-standard audit opinions, managers have a strong incentive to buy audit opinions. However, scholars, regulators and practitioners have not paid enough attention to the determinants of successful audit opinion purchase. Previous studies have investigated the influence of various social relations between the signing auditor and stakeholders (for example, alumni association, fellow countryman association, surname association) on audit behavior. However, these existing studies provide little evidence about whether and how social relations or their specific dimensions affect the purchase of audit opinions. Audit opinion purchase is hidden, so it is necessary to deeply analyze social relations and further investigate its influence on audit opinion purchase. Therefore, this paper aims to explore whether the dialect association between CEO and signatory auditor will affect the auditor's independence, which will eventually lead to the purchase of audit opinions.
02
China Dialect and Its Influence
China has a vast territory, including 34 provincial administrative regions. China has a unified writing language since the Qin Dynasty, but the same word may have different pronunciations or intonations in different regions (provinces), resulting in various dialects (corresponding to Putonghua). Specifically, there are 17 sub-regional dialects, 98 sub-regional dialects and 167 sub-regional dialects in China (China Academy of Social Sciences, 2012). In China, speaking the same dialect can easily shorten the distance between people. The identity authentication function of the same dialect is particularly obvious, which can promote the formation of cultural identity among individuals. Relationships stem from similar attitudes, origins, identities, experiences (such as colleagues, classmates, alumni, teacher-student relationship), blood relationship and hometown relationship. Language can reflect thoughts, beliefs and attitudes, and then affect cognition and memory. Different languages embody cultural attributes. In China, people can usually establish cultural identity through the same dialect (even accent). The cultural similarity behind sharing dialects can easily arouse strong emotional resonance. Therefore, sharing dialects can make it easier for people who have known each other before to establish interpersonal trust in the future. Dialect is not a simple language, but an important cultural factor. In the four-level institutional analysis framework of Nobel Prize winner Williamson, culture is divided into the first level (embedded level), which dominates other levels. Therefore, the same dialect among individuals can produce cultural identity and promote cooperation between them. In the context of China, cultural identity based on the same dialect will promote people's unity, cooperation and even collusion. Based on the above background, this study solves the concern whether the dialect association between CEO- and auditor will damage the auditor's independence and lead to the successful purchase of audit opinions.
03
CEO- auditor dialect association
Based on the obtained ID numbers of CEO and auditor, we can clearly know their native places of provinces, cities and counties from the top six ID cards. Then match with the sub-dialect branches at the county level, and finally get whether CEO and auditor have dialect connection. The same branch of Zhi Zi dialect can make people transcend the restrictions of administrative divisions and produce a natural sense of affinity. In addition, dialect association is obviously different from fellow villagers association. Figure 1 summarizes the relationship between dialect association and fellow villagers association. County-level (a) The dialect association based on the association of fellow villagers and sub-dialect branches almost completely overlap, that is, the CEO and the signing auditor in the same county are likely to use the same sub-dialect branch. However, we can't think that the county-level countrymen association is equivalent to the CEO- auditor dialect association based on the sub-dialect branch. As a matter of fact, the following aspects are worth noting: the provincial (c) and municipal (b) kinship is different from the dialect association based on sub-dialect branches. Just because people in the same province or city do not mean that they speak the same sub-dialect branch. In particular, only the county-level townsman association is very close (even completely overlapping) to the dialect association at the sub-dialect branch level; In addition, individuals who have no provincial, municipal and county kinship can still establish dialect association. For example, people from two or more neighboring counties, cities and even provinces may speak the same dialect even though they belong to different administrative divisions. The above facts show that dialect association, as a specific social bond, can break through the restrictions of administrative divisions, thus distinguishing it from fellow villagers association. In addition, within the scope of interpersonal relationship, dialect association is a relatively broad concept, rather than fellow-townsman association.
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The influence of social identity theory and CEO- auditor dialect association on audit opinion purchase
Based on the theory of social identity, people tend to classify those who have the same (similar) characteristics as "inner groups" and those who have no similar characteristics as "outer groups". Individuals generally accept the behaviors and norms of inner group members-more trust, cooperation and positive evaluation, and then allocate more resources to members of "inner group". In fact, there is a general phenomenon of intra-group bias in group activities; In contrast, people's recognition of individuals from other groups is low, showing "discrimination from other groups."
Cultural identity is the core component of social identity theory. Dialect is an important cultural dimension, and the same dialect means a common culture in some cases. Cultural similarity can promote social interaction, reduce information friction and debate between individuals, and thus increase the possibility of reaching a consensus. In addition, dialect, as an important symbol of people's "classification" and "recognition" and as a first language, can usually promote interpersonal communication. Therefore, dialect association helps to establish and maintain social relations for members of the inner group, which is always the basis for establishing intimate relations. In China, the role of dialect identification is particularly obvious. The vastness of the region and the diversity of dialects lead to obvious differences in pronunciation and accent. In social communication, the same dialect can narrow the distance between individuals, because dialect always means cultural identity, and cultural consistency can help people form strong emotional resonance and establish the same view on things.
When a customer is given a non-standard audit opinion, it conveys a negative impression on the company's operation, and attracts great attention from regulators, investors and stakeholders, resulting in reputation loss and high transaction costs for the company. If the CEO and one or more signing auditors speak the same dialect, the CEO has an incentive to communicate with the signing auditors through interpersonal relationship, which is based on dialect association, so as to avoid obtaining non-standard audit opinions, which may be related to purchasing audit opinions. Cultural identity based on dialect relationship encourages collusion between CEO and auditor, weakens auditor's independence, and increases the possibility that customers can successfully purchase audit opinions.
In addition, the fierce competition in China's audit market reduces the auditor's independence and the requirement for high audit quality. Allen and other studies have pointed out that the protection of investors in China's capital market is insufficient and the law enforcement is weak. Without strong enforcement, the provisions on auditor independence are just words. Therefore, the fierce competition and weak law enforcement in China's audit market have prompted collusion between CEO and auditors.
To sum up, the dialect association between CEO and auditor leads to partiality within the group, which leads to immoral behavior of CEO and ultimately damages the independence of auditor. After weighing the income of audit fees with the cost of potential reputation and litigation losses, the intimate interpersonal relationship based on dialect association dominates. In other words, the signing auditor is more likely to collude with the CEO, which eventually leads to the successful purchase of audit opinions by customers.
05
Conclusion, contribution and enlightenment
This paper discusses the influence of dialect association between CEO and auditor on audit opinion purchase. The results show that the dialect association between CEO and auditor increases the possibility of customers successfully purchasing audit opinions, and reveals that interpersonal relationships based on dialect association lead to collusion between CEO and auditor and damage the independence of auditor. In addition, auditor reputation weakens the influence of CEO- auditor dialect association on audit opinion purchase. Furthermore, after the county (city, province) is included, the dialect association between CEO and auditor still has a negative impact on audit behavior, which shows that the dialect association between CEO and auditor can break through the administrative region and have a significant impact on audit behavior.
The possible contributions of this paper are as follows: First, it supplements the previous literature on the influence of culture on audit behavior. Previous studies have confirmed that culture affects corporate decision-making and auditing behavior. In recent years, scholars have paid close attention to the influence of social relations on audit results. However, as an important cultural dimension, language and dialect have not been fully explored. Secondly, this study supplements the previous literature on the purchase of audit opinions, which points out that the purchase of audit opinions is an important topic, but the empirical research on the purchase of audit opinions is still insufficient. Finally, this paper supplements the literature on the influence of auditor's special characteristics on audit results. Previous studies have paid attention to the economic consequences of auditor's demographic characteristics, work experience or social relations at the individual level, but ignored the influence of auditor's language characteristics.
In addition to the above contributions, the practical enlightenment of this paper is as follows: First, in China (Allen et al., 2005) where the institutional environment is relatively weak, when the CEO and the signing auditor establish social relations on the basis of dialect association, the auditor's independence will be damaged. Regulators (such as China Securities Regulatory Commission and CICPA) should pay attention to the negative impact of hidden social relations on audit results, strengthen supervision over the dialect-related companies of CEO and auditor, and legally require the disclosure of social relations information between CEO and auditor to reduce the possibility of collusion. Second, auditor's reputation can alleviate the adverse impact of CEO- auditor dialect association on audit opinion purchase, so CICPA should pay attention to the cultivation of auditor's reputation awareness in order to realize the healthy development of audit market. Third, investors should pay attention to the immoral side of the dialect association between CEO and auditor. Although the dialect connection between CEO and auditor is convenient for communication, it is more likely to undermine the auditor's independence. A comprehensive analysis of ID card information can help investors get the social relations of managers and help them make rational decisions. Finally, auditors should enhance their risk awareness and professional caution to prevent their emotions from being affected by interpersonal relationships, which are often accompanied by the damage of auditors' independence.
