Skip to main content
SpringerLink
Log in

The determinants of the decisions between integrated and non-integrated audits from the perspective of corporate governance

  • Original Article
  • Published:
International Journal of Disclosure and Governance Aims and scope Submit manuscript

Abstract

SOX requires that the audit of internal control over financial reporting (ICFR) is “integrated” with the audit of the financial reports, which means the same audit firm conducts these two audits. Prior studies found that audit costs and quality were lower for non-integrated audits in the Chinese context (Gunn et al. in Account Rev, 2021). This paper reports the association between firms’ internal corporate governance mechanisms and the decision between integrated and non-integrated audits in Chinese companies. The empirical results demonstrate that firms with a larger proportion of controlling owners or those in which the same person is the BOD chairman and CEO, or those that are state-owned or have a smaller proportion of independent directors, are more likely to choose non-integrated audits than integrated audits. Our study implies that firms with weak internal corporate governance mechanisms choose non-integrated audits or switch to non-integrated ones if integrated audits are not mandatory. Our conclusions provided evidence that helps regulators understand the consequence of the regulation enforcement on public companies with different corporate governance models if these regulation compliance options are available.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

References

  • Abdel-Khalik, A.R. 2002. Reforming corporate governance post-Enron: Shareholders’ Board of Trustees and the auditor. Journal of Accounting and Public Policy 21 (2): 97–103.

    Article  Google Scholar 

  • Ashbaugh, H., and T.D. Warfield. 2003. Audits as a corporate governance mechanism: Evidence from the German market. Journal of International Accounting Research 2 (1): 1–21.

    Article  Google Scholar 

  • Barzel, Y. 1997. Economic analysis of property rights. Cambridge University Press.

    Book  Google Scholar 

  • Beasley, Mark S., Joseph V. Carcello, Dana R. Hermanson, and Paul D. Lapides. 2000. Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons 14 (4): 441–454.

    Article  Google Scholar 

  • Bedard, J.C., R. Hoitash, U. Hoitash, and K. Westermann. 2012. Material weakness remediation and earnings quality: A detailed examination by type of control deficiency. Auditing: A Journal of Practice & Theory 31 (1): 57–78.

    Article  Google Scholar 

  • Bednar, M.K. 2012. Watchdog or lapdog? A behavioral view of the media as a corporate governance mechanism. Academy Management Journal 55 (1): 131–150.

    Google Scholar 

  • Bhaskar, L.S., J.H. Schroeder, and M.L. Shepardson. 2019. Integration of internal control and financial statement audits: Are two audits better than one? The Accounting Review 94 (2): 53–81.

    Article  Google Scholar 

  • Bloomfield, R.J. 2004. Discussion of examining the role of auditor quality and retained ownership in IPO markets: Experimental evidence. Contemporary Accounting Research 21 (1): 131.

    Article  Google Scholar 

  • Brickley, J.A., and C.M. James. 1987. The takeover market, corporate bond composition, and ownership structure: The case of banking. Journal of Law and Economics 30: 161–218.

    Article  Google Scholar 

  • Cassell, C.A., G.A. Giroux, L.A. Myers, and T.C. Omer. 2012. The effect of corporate governance on auditor-client realignments. Auditing: A Journal of Practice & Theory 31 (2): 167–188.

    Article  Google Scholar 

  • Chau, G., and P. Leung. 2006. The impact of board composition and family ownership on audit committee formation: Evidence from Hong Kong. Journal of International Accounting, Auditing, and Taxation 15 (1): 1–15.

    Article  Google Scholar 

  • Cohen, J., G. Krishnamoorthy, and A.M. Wright. 2002. Corporate governance and the audit process. Contemporary Accounting Research 19 (4): 573–594.

    Article  Google Scholar 

  • Cohen, J.R., J.R. Joe, J.C. Thibodeau, and G.M. Trompeter. 2020. Audit partners’ judgments and challenges in the audits of internal control over financial reporting. Auditing: A Journal of Practice & Theory 39 (4): 57–85.

    Article  Google Scholar 

  • Copley, P.A., and E.B. Douthett Jr. 2002. The association between auditor choice, ownership retained, and earnings disclosure by firms making initial public offerings. Contemporary Accounting Research 19 (1): 49–76.

    Article  Google Scholar 

  • Donaldson, W. 2005. Testimony concerning the impact of the Sarbanes–Oxley Act before the House Committee on Financial Services. http://www.sec.gov/news/testimony/ts042105whd.htm.

  • Doyle, J., W. Ge, and S. McVay. 2007. Accruals quality and internal control over financial reporting. The Accounting Review 82 (5): 1141–1170.

    Article  Google Scholar 

  • Fan, J.P., and T.J. Wong. 2002. Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics 33 (3): 401–425.

    Article  Google Scholar 

  • Fan, J.P., and T.J. Wong. 2005. Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research 43 (1): 35–72.

    Article  Google Scholar 

  • Foss, N.J. 2003. The strategic management and transaction cost nexus: Past debates, central questions, and future research possibilities. Strategic Organization 1 (2): 139–169.

    Article  Google Scholar 

  • Foster, B.P., W. Ornstein, and T. Shastri. 2007. Audit costs, material weaknesses under SOX Section 404. Managerial Auditing Journal 22 (7): 661–673.

  • Gunn, J. L., C. Li, L. Liao, and S. Zhou. (2023). Is it better to kill two birds with one stone? Internal control audit quality and audit costs for integrated versus nonintegrated audits. The Accounting Review 98 (1): 251–283.

  • Hammersley, J.S., L.A. Myers, and C. Shakespeare. 2008. Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002. Review of Accounting Studies 13 (1): 141–165.

    Article  Google Scholar 

  • Herda, D.N., M.A. Notbohm, and T.D. Dowdell Jr. 2014. The effect of external audits of internal control over financial reporting on financial reporting for clients of Big 4, Second-tier, and small audit firms. Research in Accounting Regulation 26 (1): 98–103.

    Article  Google Scholar 

  • Hoag, M.L., and C.W. Hollingsworth. 2011. An intertemporal analysis of audit fees Section 404 and material weaknesses. Auditing: A Journal of Practice & Theory 30 (2): 173–200.

    Article  Google Scholar 

  • Hoitash, R., U. Hoitash, and K.M. Johnstone. 2012. Internal control material weaknesses and CFO compensation. Contemporary Accounting Research 29 (3): 768–803.

  • Huang, H.W., K. Raghunandan, T.C. Huang, and J.R. Chiou. 2015. Fee discounting and audit quality following audit firm and audit partner change Chinese evidence. The Accounting Review 90 (4): 1517–1546.

    Article  Google Scholar 

  • Imhoff, G. (2003). Accounting quality, auditing, and corporate governance. Auditing and Corporate Governance (January 2003).

  • Joseph, J., W. Ocasio, and M.-H. McDonnell. 2014. The structural elaboration of board independence: Executive power, institutional logics, and the adoption of CEO-only board structures in US corporate governance. Academy Management Journal. 57 (6): 1834–1858.

    Google Scholar 

  • Ke, B., C. Lennox, and Q. Xin. 2015. The effect of China’s weak institutional environment on the quality of Big 4 audits. The Accounting Review 90 (4): 1591–1619.

    Article  Google Scholar 

  • Krishnan, J., J. Krishnan, and H. Song. 2011. The effect of auditing standard No. 5 on audit fees. Auditing A Journal of Practice & Theory 30 (4): 1–27.

    Article  Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. 1999. Corporate ownership around the world. Journal of Finance 54 (2): 471–517.

    Article  Google Scholar 

  • Lin, Z.J., and M. Liu. 2009. The determinants of auditor switching from the perspective of corporate governance in China. Corporate Governance: An International Review 17 (4): 476–491.

    Article  Google Scholar 

  • Liu, G.S., and P. Sun. 2005. The class of shareholdings and its impacts on corporate performance: A case of state shareholding composition in Chinese public corporations. Corporate Governance: An International Review 13 (1): 46–59.

    Article  Google Scholar 

  • Marquis, C., and M. Raynard. 2015. Institutional strategies in emerging markets. Academy of Management Annals 9 (1): 291–335.

    Article  Google Scholar 

  • Mather, P., and Ramsay, A. 2003. “The effects of corporate governance mechanisms on earnings and impression management around CEO changes,” Annual Financial Reporting and Business Communication Conference, Cardiff, July.

  • North, D.C. 1990. Institutions, institutional change, and economic performance. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Ostrom, E. 2005. Understanding institutional diversity. Princeton: Princeton University Press.

    Google Scholar 

  • Quick, R., N. Schenk, F. Schmidt, and T. Towara. 2018. The impact of corporate governance on auditor choice: Evidence from Germany. Journal of Management and Governance 22 (2): 251–283.

    Article  Google Scholar 

  • Riordan, M.H., and O.E. Williamson. 1985. Asset specificity and economic organization. International Journal of Industrial Organization 3 (4): 365–378.

    Article  Google Scholar 

  • Weisbach, M. 1988. Outside directors and CEO turnover. Journal of Financial Economics 20: 431–460.

    Article  Google Scholar 

  • Wilkinson, B.R., and C.E. Clements. 2006. Corporate governance mechanisms and the early-filing of CEO certification. Journal of Accounting and Public Policy 25 (2): 121–139.

    Article  Google Scholar 

  • Williamson, O.E. 2000. The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature 38 (3): 595–613.

    Article  Google Scholar 

  • Zajac, E.J., and J.D. Westphal. 1995. Accounting for the explanations of CEO compensation: Substance and symbolism. Administration Science Quarterly. 40 (2): 283–308.

    Article  Google Scholar 

  • Zhang, J., and J. Han. 2016. Adoption of S arbanes–Oxley act in China: Antecedents and consequences of separate auditing. International Journal of Auditing 20 (2): 108–118.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Accounting, School of Business, China University of Law and Political Science, Beijing, China

    Meiqun Yin

  2. Department of Economics and Management, Lvliang University, Lvliang, China

    Liyang Wang

  3. Department of Accounting and Finance, College of Business, University of Wisconsin Eau Claire, Eau Claire, USA

    Jidong Zhang

  4. Department of Business Administration, College of Business, Winona State University, Winona, USA

    Jing Han

Authors
  1. Meiqun Yin
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Liyang Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jidong Zhang
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Jing Han
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jidong Zhang.

Ethics declarations

Conflict of interest

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Yin, M., Wang, L., Zhang, J. et al. The determinants of the decisions between integrated and non-integrated audits from the perspective of corporate governance. Int J Discl Gov 21, 241–251 (2024). https://doi.org/10.1057/s41310-023-00187-3

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41310-023-00187-3

Keywords

Search

Navigation