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SUMMARY: This study draws on the theoretical framework of Hofstede's model to examine the impact of different cultural dimensions on audit-detected accounting errors. Based on the accounting errors detected in 80 foreign enterprises of different cultures operating in China, we test the direct effect of the cultural dimensions, power distance and individualism, on the magnitude of accounting errors. The results indicate that power distance and individualism have significant explanatory power in describing the differences in the relative magnitude of errors. Centralization of power in a few individuals, management override of controls, and less competent personnel are important attributes of a large power distance enterprise that contribute to larger errors. Enterprises of an individualist culture, which are characterized by higher personnel turnover and more reliance on accounting numbers for individual performance evaluation, are found to have larger errors. These results should be useful for auditors in assessing the likelihood of material errors from a cultural perspective.
Keywords: audit-detected accounting errors; cultural influence; individualism; power distance.
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INTRODUCTION
The main responsibility of auditors is to plan and perform audits to provide reasonable assurance of detecting material misstatements in financial statements. To detect misstatements, auditors rely heavily on professional judgment, past experience, and knowledge of accounting errors. Information on the characteristics of accounting errors helps auditors assess risk, plan audit procedures, and thus improve the effectiveness and efficiencies in detecting misstatements.
Over the past decades, substantial archival research has studied the incidence of accounting errors and their detection by auditors mainly in the U.S., U.K., and Canada (for details, see Eilifsen and Messier 2000). However, little empirical evidence exists about the characteristics of errors detected in accounting populations outside the Anglo-American countries. Only two studies (Chan and Mo 1998; Eilifsen et al. 2002) examined the characteristics of errors in Hong Kong and Norway. The results of these two studies indicate some unique features of misstatements detected. These differences are due to different economic, cultural, and financial environments. To enhance understanding of the incidence of misstatements in different countries, Eilifsen and Messier (2000) call for more multinational archival error studies in countries outside the Anglo-Saxon sphere, particularly those in emerging economies. In response to this call, our study examines the accounting errors detected by...