SOX internal control deficiencies and auditors of U.S.-listed Chinese versus U.S. firms

Abstract

This study compares Sarbanes Oxley Section 302 ineffective internal control disclosures (IICs) and auditors of U.S.-listed Chinese and U.S. domiciled firms with four main findings. First, U.S.-listed Chinese firms report significantly more IICs than matched U.S. domiciled firms. Second, IICs are concentrated among Chinese firms that list directly in the U.S. versus those that also cross-list in China with added Chinese regulatory oversight. Third, Chinese firms that list directly (cross-list) in the U.S. are significantly less (more) likely to employ Big 4 auditors than cross-listed Chinese and matched U.S. firms. Fourth, the IICs of U.S.-listed Chinese firms relate primarily to financial statement preparation, personnel and remediation. Finally, we compare the Big 4 auditors engaged by U.S.-listed Chinese and U.S. domiciled firms. To our knowledge, this study provides the first direct evidence regarding the IICs and auditors of U.S.-listed Chinese firms, matters of interest to regulatory authorities and firm stakeholders globally.