The concept of guanxi within the Chinese audit framework

Abstract

The purpose of this work is to understand how the concept of guanxi influences the audit practice in China, with a focus on both domestic and foreign audit firms. This assumption finds its root in the Chinese relation-oriented society, whose peculiarity is worthy of analysis. Often translated as “special relation”, in the first chapter I will offer an overview of its meaning, with its main characteristics and the related concepts. Then an overview about the Chinese audit framework with the legal characteristics and a comparison between local and foreign audit firms in China is presented. The literature review of the second chapter will outline how guanxi influence the Chinese society, the business of firms and the audit practice. This will provide the theoretical basis of the investigation of the third chapter, which starts with an empirical background of every year into consideration is proposed. Specifically, the total business revenue of the top 100 firms, with particular reference to the Big Four, is stated. Then, the total revenues of the top six in ranking, with their number of CPAs and branches is compared to the data of the Annual Reports on Auditing of Listed Companies. The ranking by revenue highlights the supremacy of the Big Four plus BDO China for what concerns audit fees, but this is inconsistent with the effective number of audited clients. No correlation between guanxi and revenue is found, as it appears that a higher level of revenue does not imply a broader guanxi network, but yet a strong brand awareness and a higher reputation. In this perspective, good quality guanxi can bring many advantages for the domestic audit firms. First, in accordance with the literature review, a narrow clients’ portfolio should increase the trustworthiness of the CPAs’ reports. Second, the establishment of brand awareness is strictly related to the perceived reliability of the audit practice. Third, this will allow domestic audit firms to change their price strategy, from a low-balling strategy, to an increase of fees charged. Adopting these changes could upset the ranking in the future and give more authorative power to the Chinese accounting firms.