Ownership effects on audit-detected error characteristics : an empirical study in an emerging economy

Koon Hung CHAN, Lai Lan, Phyllis MO

Research output: Journal PublicationsJournal Article (refereed)peer-review

3 Citations (Scopus)

Abstract

The presence of foreign subsidiaries and local companies, each playing a significant role in the local economy is a typical phenomenon in the business environment of emerging economies. The objective of this study is to extend the research concerning the relationship between environmental factors and error occurrence by examining the impact of organizational ownership (foreign subsidiaries in Hong Kong vs. local Chinese companies) on error characteristics. The second objective of this study is to examine the empirical characteristics of errors in an emerging economy, Hong Kong, with references to relevant U.S. studies. Hong Kong is part of the Chinese Economic Area, a Big Emerging Market identified by the U.S. Department of Commerce. In the past two decades, while there have been numerous empirical studies on error characteristics for U.S. audit data, there is a scarcity of such studies using non-U.S. data. Due to differences in organizational culture, nature of business transactions as well as accounting practices, the error characteristics detected in audit populations in emerging economies may be significantly different from those discovered in the U.S. Results of this study should facilitate audit efficiency and effectiveness through improved audit risk assessment for each ownership type company and should also alert management of multinational corporations to incorporate the potential differences in error patterns in designing and implementing effective accounting controls for companies outside the U.S.
Original languageEnglish
Pages (from-to)235-261
Number of pages27
JournalThe International Journal of Accounting
Volume33
Issue number2
DOIs
Publication statusPublished - 1 Jan 1998

Funding

Hong Kong was chosen for this study becauseo f its unique characteristicsa s an emerging economy with a rapid growing audit market for international accounting firms (Lee, 1994),a nd becauseo f its long tradition as a meeting point betweenE ast and West. Hong Kong has emerged as an international finance and trade center over the past several decadesa nd is part of a Big Emerging Market identified by the U.S. Departmento f Commerce (1995). It is ranked the world’s 8th largest trading entity in terms of total trade values in 1995 (Economic Information and Agency, 1996). The number of companies listed in the Hong Kong Stock Exchange has grown by over 60% in the past decade(The Stock Exchange of Hong Kong, 1986, 1996). Total market capitalization has increased more than tenfold from US$35,769 million to US$445,636m illion during the samep eriod. Furthermore,s ince the adoption of open door policy by the People’s Republic of China (P.R.C.) in 1978,m any multinational companiesh ave establisheds ubsidiary companiesi n Hong Kong as a stepping stone for entering the China market.A mong the Big Emerging Markets, the Chinese Economic Area (China, Hong Kong and Taiwan) representsb y far the largesta nd one of the most important emergingm arketsb oth now and in the foreseeable future. According to a 1993 World Bank estimate,t he combined gross domestic product of this area in the year 2002 will total approximatelyU S$lO trillion. This figure would representt he largests ingle regional proportion,s urpassingt he U.S.’ projectedG DP of US$9.7 trillion (Garten, 1996).I n view of theses ignificant developments,B ig Six have rapidly expanded their operations in both Hong Kong and China to meet the surged demand. Five of the Big Six have more than 1,000 professional staff membersi n Hong Kong with the smallesto ne having about 700 (SCMP, 1997).

Keywords

  • Audit planning; emerging economy; error characteristics; ownership effects

Fingerprint

Dive into the research topics of 'Ownership effects on audit-detected error characteristics : an empirical study in an emerging economy'. Together they form a unique fingerprint.

Cite this