Capital verification and auditor liability: evidence from China
Abstract
Purpose
This paper aims to examine the different perspectives of auditors and non-auditors on this question, along with the rationale and impact of these differences. Chinese company law requires an audit report on paid-up capital when business entities are newly formed or their capital altered, which raises questions regarding the liability of auditors should the business entities fail.
Design/methodology/approach
Interviews and a questionnaire survey were conducted to analyse how legislation can impact on interested parties in a relatively immature audit environment. The theories of social construction of reality and symbolic interactionism are used as a basis for explaining the different conceptions of capital verification held by interested parties.
Findings
There is a mismatch between the purpose of capital verification and the functions of paid-up capital. Paid-up capital is not a reliable indicator of business liquidity and creditworthiness. Auditors and non-auditors have different understandings about the assurance provided by paid-up capital at the point of company formation or auditing field work, and at the point of actual trading after the company formation or auditing field work. They also differ on the causation between deficient capital verification reports and trading loss. The liability crisis adversely influenced auditors’ perception of the capital verification service, although it did not lead to outright rejection by them.
Originality/value
This paper describes an important compliance auditing service in China. By conducting an analysis of the conflicting views of auditors and non-auditors on capital verification, it contributes to the existing literature on the sources of disputes between auditors and other stakeholders, and the efforts to establish a balanced auditor liability regime.
Keywords
Acknowledgements
The authors thank Prof Mark Clatworthy and participants of the 2013 American Accounting Association annual meeting.
Citation
Lu, Y., Mitchell, F. and Pong, C. (2015), "Capital verification and auditor liability: evidence from China", Managerial Auditing Journal, Vol. 30 No. 6/7, pp. 657-680. https://doi.org/10.1108/MAJ-02-2014-1002
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited