Over the past quarter century China has moved from a state-controlled economy to one that relies increasingly on market-based financing. The development of accounting principles and regulation has escalated since the trading of shares began in 1990 (Lin & Feng, 2001). Some descriptive studies portray the extent to which published financial statements comply with readily observable disclosure requirements (Xiao, 1999). However, there is little evidence about how disclosure judgments are made. Some observers indicate that experimental evidence may be most appropriate in determining how accounting standards are applied, particularly in different cultures and with different incentives (Nelson, 2003, Pownall & Schipper, 1999). The current study gathers judgments from over 200 experienced accountants facing mixed incentives for reporting required related party disclosures. The incentives are derived from conditions distilled from China’s environment to develop two realistic cases. To set expectations about disclosure judgment, theoretical arguments are provided about China’s setting relative to settings in countries that have considerable history with market-based financing. Internal accountants (chief accounting officers – CAOs) and external auditors (CPAs) provide their judgments about the same cases to study how the incentives within their roles affect their judgments. One case portrays a CAO and one a CPA to allow for detection of how the participating practitioners perceive the different roles affecting expected disclosure behavior. Irrespective of respondent status, results show that conflict-laden incentives are likely to result in less than full disclosure of required related party information. Practicing auditors report that the CPA auditor portrayed in the cases will more likely insist on disclosure than the CAO portrayed in the cases. This finding is driven by the participating CPAs reporting a higher probability that the CPA portrayed in the cases would insist on disclosure to a greater extent than the CAO portrayed in the cases. This finding suggests that auditors are likely to improve the quality of financial reporting in China.

EXPERIMENTAL JUDGMENTS ABOUT RELATED-PARTY DISCLOSURES IN CHINA

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