The effects of guanxi and compensation structure on the objectivity of Chinese internal auditors

Yuedong Li, Anna M. Rose, Jacob M. Rose, Fengchun Tang

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

Abstract

Purpose - This study examines the effects of incentive compensation and guanxi, a type of informal personal relationship between people, on the objectivity of Chinese internal auditors. Given that the objectivity of internal auditors is essential for promoting financial reporting quality, it is important to investigate the effectiveness of internal audit functions, especially in emerging markets where the corporate governance mechanisms designed to promote objectivity are less mature. Methodology/Approach - The research employs a 2 × 2 between participants experiment with 116 graduate accounting student participants. Findings - After controlling for internal auditors' ethicality, we find that close-guanxi between management and internal auditors and incentive compensation in the form of bonuses based upon meeting earnings targets both have the capacity to impair the objectivity of Chinese internal auditors. Participants were more tolerant of management's attempts to manage earnings when there was close guanxi or bonus compensation. Further, compensation structure only influenced internal auditors' support of management when guanxi was distant, but when there was close guanxi between internal auditors and management, internal auditors were unlikely to challenge management regardless of the compensation structure.

Original languageEnglish
Title of host publicationAdvances in Accounting Behavioral Research
EditorsDonna Bobek Schmitt, B. Douglas Clinton, Ronald J. Daigle, Amy H. Hageman, Robin R. Radtke, Sean Robb, Sally Wright
Place of PublicationBingley UK
PublisherEmerald Group Publishing Limited
Pages99-124
Number of pages26
Edition1st
ISBN (Print)9781784416362
DOIs
Publication statusPublished - 2015
Externally publishedYes

Publication series

NameAdvances in Accounting Behavioral Research
PublisherEmerald Group Publishing Limited
Volume18
ISSN (Print)1475-1488

Keywords

  • Ethicality
  • Guanxi
  • Incentive compensation
  • Independence
  • Internal audit
  • Objectivity

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