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Capital Verification: A Chinese Puzzle of Auditor Liability

This paper investigates the rationale and impact of capital verification (a compliance audit unique to China) on auditor liability. To restrict entry and regulate business capacity, Chinese law requires an audit report on paid-up capital when business entities are newly formed or their capital altered. This study analyses the mismatch between the purpose of capital verification and the functions of paid-up capital. It is argued that paid-up capital isn’t a good indicator of business liquidity and creditworthiness. The theories of duality of structure, social construction of reality and symbolic interactionism are used as a basis for explaining the different conceptions of capital verification held by interested parties. Interviews and a questionnaire survey were used to test how irrational legislation design can impact on interested parties in a relatively immature audit environment. Research results contribute to the debate on the expectation gaps between auditor and non-auditors.