Management ownership structure, audit quality and impairment of assets : evidence from China

Pao Yue-kong Library Electronic Theses Database

Management ownership structure, audit quality and impairment of assets : evidence from China

 

Author: Wong, Wai-yee Pauline
Title: Management ownership structure, audit quality and impairment of assets : evidence from China
Degree: Ph.D.
Year: 2008
Subject: Hong Kong Polytechnic University -- Dissertations.
Accounting -- China.
Auditing -- China.
Department: School of Accounting and Finance
Pages: viii, 243 leaves ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2190030
URI: http://theses.lib.polyu.edu.hk/handle/200/1801
Abstract: Following the release of 1998 Accounting Standards, Chinese regulatory authority further implemented another set of regulations in 2001 governing the write-down of impaired assets and requiring an assessment of recoverable amount on four additional categories of assets. Since the recoverable value is difficult to obtain objectively, management can discretionally assess the magnitude of write-down to affect the bottom-line profit. Using a sample of 5,399 firm-year observations in China from 1998 to 2004,1 examine whether the percentage of asset write-down by state-controlled firms differs from non-state-controlled firms in China, conditional on more conservative financial reporting rules. Moreover, I investigate whether local auditors, who are more likely subject to political influence from local governments, will support managerial decisions on asset write-down. My empirical findings support that the companies controlled by state would be less sensitive to economic losses, as compared to companies dominated by holders of non-state shares. In addition, I also find that local auditors support managerial decisions on asset write-down. Chinese regulators realize that companies may use provision for asset write-down and its reversal to build up big-bath and to smooth reported income. Therefore, the 2006 Accounting Standards forbid the reversal of recognized asset impairment provision on long-term investments, fixed assets, construction in progress, and intangible assets, effective from 2007. I examine whether incentives including controlling ownership by state and audit quality of small domestic auditors located in the region of their clients will affect reversal of recognized provision for asset write-down during the transition period. My empirical findings show that state controlled companies tend to have weak incentive in reporting asset impairment reversal, conditional on positive stock returns or positive cash flows. Companies controlled by state tend to reverse more impairment provisions, as compared to companies dominated by holders of non-state shares. Furthermore, ocal small auditors are more likely to agree with the aggressive accounting treatment on impairment reversal of their clients.

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