تاثیر استفاده از عنوان تجلیلی در گزارش حسابرسی بر ریسک تحریم های مالی بالاتر Does the use of honorific appellations in audit reports connote higher financial misstatement risk? Evidence from China

1. INTRODUCTION Linguistic codes used in language are shaped by the socialization of individual consciousness and reflect social relationships (Schatzman and Strauss 1955; Ervin-Tripp 1969; Luckmann 1975). The usage of honorifics in Chinese audit reports manifests itself as an interesting linguistic phenomenon in accounting. Many auditors in China, like those in the U.S., normally address their client companies by actual names or use abbreviations (e.g., “your company”) in audit reports. However, some auditors in China voluntarily choose to address their clients by honorifics (e.g., “your esteemed company”) in audit reports, wherein “esteemed” expresses the respectful attitude of auditors toward client managers. Drawing on sociolinguistic theories, we investigate the informativeness of honorific usage in audit reports. To the extent that financial statement users are most concerned about whether audit reports provide information for assessing financial reporting quality and distress risk, we focus on the linkage between honorific appellations and financial misstatement risk. According to sociolinguistic theories, using honorifics to address the other party not only directly conveys deference and respect, but also signifies relative social status difference (Brown and Gilman 1960). This phenomenon is particularly true in China, where Confucianism is ingrained as a cultural form (Gu 1990; Du 2015). Confucianism promotes a rigid social hierarchy as it emphasizes the seniority of people in higher social status and the submission of people in lower status. In China, such a rigid social hierarchy is well reflected by the frequent use of honorifics in formal business settings. Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 02:45 16 April 2018 (PT) 2 We argue that the tendency to use honorific appellations by some auditors reflects their perceived lower status relative to their clients, as well as their conscious or unconscious intention to be acquiescent to their clients. Impaired auditor independence hampers auditors’ capability to detect and report clients’ misstatements in their financial reports, thus leading to lower audit quality and higher risk of financial misstatements. Moreover, client management may exploit the compromised auditor independence by misstating their financial reports, thus further increasing misstatement risk. In addition, some auditors consistently address all clients with honorifics, while other auditors use honorifics in a discretionary way for some but not all clients. By selectively addressing their clients with honorifics, auditors likely exhibit a stronger proclivity of being acquiescent to their clients. Therefore, we expect that, compared to consistent honorific usage, discretionary honorific usage exhibits a stronger positive association with financial misstatement risk.