The ethical edge: how Confucianism in audit firms prevents corporate fraud

Purpose This study aims to investigate how Confucianism in audit firms influences corporate fraud in China. The research seeks to highlight the enduring relevance of Confucian principles in modern auditing practices, particularly in promoting effective corporate governance and underscores the global significance of informal regulations in mitigating corporate fraud. Design/methodology/approach Based on China A-share listed corporations from 2009 to 2021, this paper uses empirical analysis, including ordinary least squares, instrumental variable regressions, to investigate the relationship between auditors’ Confucian values and client fraud. Findings Results indicate that Confucianism in audit firms significantly reduces both the likelihood and incidence of fraud in audited companies. This effect is attributed to improved corporate governance and the promotion of Confucian ethics – including Loyalty, Benevolence, Righteousness, Discipline and Wisdom – in client firms. Besides, Confucianism in audit firms exerts stronger effect on client firms in the regions with poorer formal institution, and Confucianism in audit firms majorly inhibits audited firm’s information disclosure fraud. Originality/value This research uniquely contributes to understanding how external auditors’ Confucian values influence corporate behavior, extending beyond previous studies that focused primarily on the impact of Confucianism among corporate insiders.