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Improving Sustainability through a Dual Audit System

Shun-Ji Jin (), In Tae Hwang () and Sun Min Kang ()
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Shun-Ji Jin: Faculty of Management and Economics, Kunming University of Science and Technology, Kunming 650500, China
In Tae Hwang: Department of Accounting, College of Business and Economics, Chung-Ang University, Seoul 06974, Korea
Sun Min Kang: Department of Accounting, College of Business and Economics, Chung-Ang University, Seoul 06974, Korea

Sustainability, 2018, vol. 10, issue 1, 1-15

Abstract: As a consequence of a large-scale accounting fraud, China implemented a dual audit system for listed companies issuing foreign stocks (B shares and H shares) from 2001 to 2006, before adopting Chinese-IFRS in 2007. At the end of 2010, the EU proposed that listed corporations over a certain size should be required to implement a joint audit system. However, only a few countries have implemented this system, and thus, data and references are extremely limited. The dual audit system is called the “twin” of the joint audit system. We analyze whether the dual system improves a company’s earnings quality. Earnings quality is studied by means of real earnings management, and the variable of loss aversion. We find that real earnings management of dual audited enterprises is lower than that of single audited (A-share) enterprises, and the inclination toward loss aversion of enterprises in the foreign share market has not increased significantly relative to the A-share enterprises after the abolition of the dual audit system. The results indicate that a dual audit system improves earnings quality. We expect that the conclusions of this research will resolve the issues and concerns about the joint audit system.

Keywords: dual audit system; China; earnings quality; real earnings management; loss aversion (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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