SOX Internal Control Deficiencies and Auditors of U.S.-listed Chinese versus U.S. Firms

Abstract

This study compares the Section 302 internal control deficiencies (ICDs) and auditors of U.S.-listed Chinese and U.S. domiciled firms reporting under Sarbanes-Oxley (SOX) regulations, with four main findings. First, U.S.-listed Chinese firms disclose more than twice as many ICDs as matched U.S. domiciled firms. Second, Chinese firms listing directly in the U.S. exhibit significantly more ICDs than those also cross-listed in China, consistent with added Chinese regulatory oversight. Third, Chinese firms listing directly in the U.S. are less likely to employ Big 4 auditors than cross-listed Chinese firms or matched U.S. domiciled firms. Fourth, the ICDs of U.S.-listed Chinese firms relate primarily to financial statement preparation, personnel and remediation, and significantly exceed those of matched U.S. counterparts for every ICD type. To our knowledge, this study provides the first direct evidence regarding the ICDs and auditors of U.S.-listed Chinese firms, matters of on-going interest to regulatory authorities and other stakeholders.