The role of audit quality in preventing firm misreporting: empirical evidence from China Loan Quynh Thi Nguyen National Economics University, Hanoi, Vietnam and Centre for Applied Economics and Business Research, Hanoi, Vietnam Duong Thuy Le Centre for Applied Economics and Business Research, Hanoi, Vietnam Hiep Ngoc Luu School of Management, University of St Andrews, St Andrews, UK and Centre for Applied Economics and Business Research, Hanoi, Vietnam Anh Huu Nguyen National Economics University, Hanoi, Vietnam, and Thinh Gia Hoang University of Roehampton, London, UK and Centre for Applied Economics and Business Research, Hanoi, Vietnam Abstract Purpose – The purpose of this paper is to explore the role of external audit quality in reducing firm misreporting practices. Design/methodology/approach – Data are gathered from a number of sources including the Osiris database and firms’ annual reports to construct a comprehensive data set containing financial and non-financial information of over 3,100 publicly listed firms in China during the period 2009–2017. A number of rigorous empirical specifications are utilized with the use of probit, logit and conditional logit regressions, as well as panel pooled OLS and fixed-effect estimators. The IV-2SLS, 2-step system GMM and difference-in-differences techniques are also employed to deal with the potential endogeneity bias to ensure the robustness of the empirical results. Findings – The empirical results reveal that larger firms and firms having more tangible assets and greater retained earnings are more likely to employ a better-quality external auditor. Subsequently, higher audit quality leads to a deterioration in corporate misreporting. However, these results are not homogenous across firms. While we document similar findings in the case of non-state-owned firms, state-owned enterprises (SOEs) appear to have less tendency to hire a higher-quality auditor, and higher-quality auditors in turn do not play a significant role in reducing misreporting practices in SOEs. Originality/value – This paper contributes to a better understanding of the mechanism to mitigate corporate misreporting practices. It is one of the few to empirically investigate auditor selections and the association between external audit quality and corporate misreporting practices in China. Keywords China, Big 4, Audit quality, Discretionary accrual, Misreporting Paper type Research paper 1. Introduction Corporate misreporting has been one of the core research fields in the corporate finance literature as such misconduct can lead to a series of severe negative consequences for corporate stakeholders as well as for the overall economic system (Staubus, 2005). This issue is more pronounced in emerging economies like China, due to their less mature accounting profession (Lin and Chan, 2000) and the idiosyncratic involvement of the government (Wang et al., 2012). While China is now the world’s second largest economy, with a number of sizable emerging multinationals currently shaping the world economy, the country is still being criticized for its low-quality and low-quantity accounting International Journal of Managerial Finance Vol. 16 No. 1, 2020 pp. 83-100 © Emerald Publishing Limited 1743-9132 DOI 10.1108/IJMF-04-2019-0122 Received 1 April 2019 Revised 9 July 2019 Accepted 11 July 2019 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/1743-9132.htm 83 Role of audit quality