Can auditors’ local knowledge compensate for a weaker regulatory oversight for the audit quality of foreign companies?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)127–155
Number of pages30
Journal / PublicationAccounting and Business Research
Issue number2
Online published30 Aug 2020
Publication statusPublished - 2021


This study examines whether auditors’ local knowledge of clients can compensate for a weaker regulatory oversight in the audits of foreign companies. Based on a sample of Chinese companies that were listed in the U.S. and after controlling for other factors that may affect audit quality, we find that the audit quality of Hong Kong and Chinese non-Big 4 auditors is comparable to that of U.S. auditors with an affiliate in China and higher than that of U.S. auditors without a Chinese affiliate. Additional analysis indicates that U.S. auditors provide higher audit quality to U.S.-based listed firms than U.S.-listed Chinese firms and the quality difference is reduced for U.S. auditors with a Chinese affiliate. These results indicate that auditors’ local knowledge of foreign clients has a positive effect on audit quality and in certain circumstances, it can compensate for a weaker regulatory oversight in an international setting.

Research Area(s)

  • Audit quality, local knowledge, regulatory oversight, U.S.-listed Chinese companies