The Psychology of Auditing in China: The Need To Understand Guanxi Thinking and Feelings as Applied to Contractual Disputes

Chinese contracts normally are not very detail. This is because the Chinese, being entrenched in thousands of years of Confucian teachings, believe in the moral principle that relationships (guanxi) are paramount to formal terms and conditions. Because of the lack of detail, contractual disputes most certainly will arise. When they do, auditors must decide whether or not the disputes will mature into present obligations for which provisions for loss must be booked into the financial statements of the affected party. In order to make that decision, auditors need to understand the psychology of guanxi that is deep-rooted in the minds of the Chinese. In this article, we theorize that if there is quality guanxi between the contracting parties, when contractual disputes do appear, the way of thinking of the parties would be that they would renegotiate in order to maintain a long term relationship. Thus, contingent liabilities will not give rise to present obligations. The art of auditing as applied to China requires auditors to investigate the mind and heart of the contracting parties in order to make an informed judgment on the quality of the relationship (guanxi) that exists between them. [PUBLICATION ABSTRACT]