A Cross Cultural Study of Auditor Risk Assessment in Emerging Capital Markets

Article excerpt

Executive Summary

This study examines whether the differences in the cultural values of Chinese auditors are likely to result in differences in the risks they assess. Two countries- Taiwan and Singapore were compared in relation to three of Hofstede's cultural dimensions: uncertainty avoidance, power distance, and individualism. The results show that auditors place more emphasis on their firms' risk rather than on their personal risk. However, compared to auditors in Taiwan, auditors in Singapore seemed to be more concerned with risks at the individual level than at the group level. In general, culture is the factor that varies the risk assessment level; that is, audit practice cannot be culture free.


Following the rapid globalization of the business environment, the endeavors made to issue the International Auditing Standards by the International Federation of Accountants (IFAC) and to attain a single global set of audit procedures by international audit firms have extensively contributed to recognizing the importance of harmonization of auditing standards and practices. However, the success in standardization globally remains an on-going debate (Street, Gray & Bryant, 1999) and one notable argument is cultural influence upon standardization (Farrell & Cobbin, 2001). To analyze the association that culture may have on auditing, a number of previous studies have been conducted based on the work of Hofstede (1984). Most of these studies have examined various aspects of auditors' attitude towards giving "subject to" qualifications (Gul & Tsui, 1993); the magnitude of accounting errors detected (Chang, Lin & Mo, 2003); and auditor licensing, independence and ethical reasoning (Margerison & Moizer, 1996; Patel & Psaros, 2000; Tsui & Windsor, 2001; Aileen & Evelyn, 2005; Su, 2006). Also explored has been the question of the perceptions of students and security analysts in financial risk judgments (Bontempo, Bottom & Weber, 1997). However, cultural effects on auditor risk assessments have not received a similar degree of attention. Therefore, this study will consider three of Hofstede's cultural dimensions - uncertainty avoidance, power distance, and individualism - as they relate to the risks an auditor faces when conducting an audit engagement.

The risks in this study can be thought of as having three components. The first risk is the auditor's audit risk (Audit risk) because the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. The second risk refers to the audit firm's business risk (Business risk). This is the risk to the audit firm from association with the client, and consists of the risk of potential litigation costs and the related effect on the audit firm's reputation and the risk of other costs (not related to litigation) such as problems with fee realization (bad debts). The final risk is the auditor's own personal risk (Personal risk), which is the risk of damage to the individual auditor's own personal reputation from being associated with the client and is distinct from the risk to the audit firm overall. Five hypotheses were set in terms of Hofstede's (1994) cultural dimensions of uncertainty avoidance, power distance and individualism between Singapore and Taiwan. The intention was to ascertain the extent to which cultural influences affect the actual risk perceptions of auditors because Singapore and Taiwan have mainly Chinese-based populations and have experienced similar economic development, and an influx of foreign businesses as well as the control of family firms throughout the economy. A Mann-Whitney U-test and a Wilcoxon z-test were used to test these hypotheses. In general, the overall results do support our hypotheses that culture is the factor which varies auditor risk assessment level. In other words, audit practice cannot be culture free.

The rest of this paper is organized as follows: first, theory and hypotheses are developed, then the methods used are discussed, and finally the results are analyzed. …