Accounting Inspections and Corporate Misconduct: Evidence from Chinese Listed Firms

The impact of financial and accounting oversight depends in part on whether inspections deter corporate misdeeds. Using deterrence theory, we ask whether accounting inspections constrain corporate misconduct, which governance responses may explain the association, and under what conditions it is stronger. We examine the Ministry of Finance’s accounting information quality inspections using a difference-in-differences design with staggered inspection timing for Chinese A-share listed firms over 2007–2024. The baseline estimates show lower misconduct probability and frequency after inspection. Mechanism analyses examine internal control deficiencies, managerial myopia, and audit monitoring as possible explanations. The effects are more pronounced for less complex businesses, for regions with weaker legal environments, and for industries with more intense competition. The findings also differ depending on the type of misconduct, with more pronounced effects for serious misconduct and disclosure-related misconduct. These findings contribute to the literature on the relationship between accounting inspections and corporate misconduct. They also influence the inspection and remediation practices of fiscal authorities, the internal control improvements of firms and the risk assessments of auditors.