Does National Auditing Improve Local Fiscal Transparency? Evidence From China
ABSTRACT
This paper examines whether and how national audits affect local fiscal transparency in China. Using panel data from 30 provinces between 2009 and 2018, we find that national audits significantly improve local fiscal transparency after controlling for various economic and institutional factors. The effect of national audits on fiscal transparency varies significantly by region, which is stronger and statistically significant in eastern regions and in regions with high land finance, while not significant in central-western regions or in those with low land finance. Furthermore, the positive impact is primarily driven by the disclosure and defense functions. These findings suggest that national audits are valuable for improving fiscal transparency, but their effectiveness varies depending on regional economic development and local government financing mechanisms.
1 Introduction
Fiscal transparency is essential for promoting good governance and economic development, significantly contributing to political stability and robust economic growth at the national level (Beetsma et al. 2022). As governments face increasing pressure for accountability and efficient resource management, mechanisms to enhance fiscal transparency have become a central focus of public administration research. Enhancing fiscal transparency is critical for improving national governance (Chen and Neshkova 2020), and accelerating government function transformation is necessary for advancing the modernization of national governance systems and capabilities. National audit, a specialized activity conducted by national audit authorities in accordance with relevant laws and regulations, has emerged as a key mechanism for promoting transparency. This activity involves examining government budgetary revenues and expenditures, as well as accounting information within state organs, administrative institutions, and state-owned enterprises. National audit plays an integral role in the state supervision system and significantly contributes to the modernization of national governance (Yang et al. 2008). In the context of potential risks related to local government land capitalization, the national audit system provides institutional safeguards against significant risks (Su et al. 2023). In China, national auditing has the potential to improve fiscal transparency at the local government level, yet its effectiveness and the conditions under which it operates most successfully remain empirically understudied.1
This paper examines the impact of national audits on local fiscal transparency in China, using a comprehensive data set covering 30 provinces from 2009 to 2018. The study makes several contributions to the literature. First, we provide robust empirical evidence that national audits significantly improve local fiscal transparency. Using principal component analysis (PCA) to construct a comprehensive audit score, we find that a one-standard-deviation increase in the audit score corresponds to a 0.103 increase in the fiscal transparency score, equating to approximately a 0.3% increase at the mean transparency level. This finding is consistent across various robustness checks, including alternative measures of audit effectiveness and instrumental variable approaches. While previous studies have explored various determinants of fiscal transparency, this paper is among the first to provide evidence on the role of national audits in promoting transparency, particularly in the context of a large developing country with significant regional variations in economic development and governance capacity.
Second, we uncover substantial regional heterogeneity in the effectiveness of national audits. Our results show that national audits have a stronger positive effect on fiscal transparency in eastern regions compared to central-western regions. Specifically, the coefficient for the audit score in eastern regions (0.191) is more than two times larger than in central-western regions (0.094), and it is statistically significant only in the eastern regions. This regional variation may be influenced by differences in economic development and governance capacity. Eastern regions, with stronger institutions and resources, are more effective at implementing national audit findings, while central-western regions, with weaker institutions and socioeconomic challenges, experience limited effectiveness. This suggests that the success of national audits is contingent upon local institutional capacity and economic development levels.
Third, we identify an important interaction between national audits and land finance practices. Our analysis reveals that national audits have a stronger impact on fiscal transparency in regions with a high reliance on land finance. In these regions, a one-unit increase in audit score is associated with a 0.131-point increase in fiscal transparency, compared to a nonsignificant effect in regions with low land finance. This highlights the critical role of national audits in enhancing fiscal transparency in areas heavily dependent on land finance, driven by increased public scrutiny and stronger oversight mechanisms. These mechanisms are rooted in the 1994 tax-sharing reform and subsequent policies that positioned land as a key financing tool for local governments in China (Chen and Wu 2020; Ji et al. 2020; Wu 2022).
These findings have important implications for policy and practice, suggesting that while national audits can effectively improve fiscal transparency, their impact varies significantly based on regional characteristics and local government financing patterns. This heterogeneity underscores the need for tailored approaches to audit implementation and oversight, particularly in less developed regions where audits may have a more limited impact. The remainder of this paper is organized as follows: Section 2 reviews the relevant literature and develops our theoretical framework. Section 3 presents our research hypotheses. Section 4 describes our data and empirical strategy. Section 5 presents our main results and robustness checks, including analyses of regional heterogeneity and the role of land finance. Finally, Section 6 concludes the study.
2 Literature Review
National audit serves as a pivotal aspect of national governance, aiming to fulfill the fundamental goal of serving national interests (Yang et al. 2008). By exerting governance effects and actively engaging in disclosure, prevention, and defense activities, national audit contributes to the strengthening of the overall national governance system and the improvements in its capabilities (Su et al. 2023). Within the framework of national governance, national audit collaborates with other systems, utilizing coordinating mechanisms to effectively achieve macro governance objectives. As the cornerstone of national governance, national audit serves as a vital guarantee and driving force for the advancement of modernizing national governance systems and capabilities. National audit consolidates the foundation of national governance by reinforcing supervisory responsibilities, evaluating efficiency, enhancing transparency, and promoting democratic rule of law. Ultimately, it fosters good governance and enhances the effectiveness of national governance (Rahayu et al. 2020).
Extensive research in the existing literature has thoroughly demonstrated the far-reaching governance effects of national audit, particularly in driving the long-term development of regional economies by improving the governance efficiency of local governments (Abdolmohammadi and Tucker 2002). Through its supervisory and safeguarding roles in disclosure, prevention, and defense, national audit facilitates high-quality economic development (Wei et al. 2023). Additionally, it plays a critical role in combating corruption by effectively examining, controlling, correcting, and guiding legal actions against public officials, thereby preventing corruption on a larger scale (Lino et al. 2022). Strengthening the independence of national audit significantly governs the conduct of official receptions by local governments, thus restraining excessive expenditures associated with such receptions (Liu and Lin 2012). Moreover, national audit exerts supervisory, incentive, and spillover effects that promote innovative activities (Zhang and Wang 2025). The impact is more pronounced in enterprises characterized by low equity balance, limited director shareholding and compensation, and low transparency. Lastly, national audit has a certain effect on governing the transition from tangible to intangible assets within state-owned enterprises. With stronger deterrent and disclosure effects, excessive financialization tendencies within these enterprises are more effectively restrained.
Scholars have extensively examined the role of national audit in preventing and managing debt risks associated with local government land financing. First, national audit can audit the establishment of early warning systems for debt risks within local financing platforms (Talbot and Wiggan 2010). This involves assessing the flow, utilization, benefits, and repayment capacity of local government debt funds. National audit plays a crucial role in identifying information and issuing risk warnings as part of risk management for local government debt (Consiglio et al. 2023). Its functions involve data acquisition, analysis, risk identification, and evaluation. The preventive attributes and mechanisms of national audit in managing local debt risks primarily manifest in risk warning, incremental risk control, and stock risk resolution. By supervising the operation of local government powers, national audit can substantially reduce the level of risk associated with local debt. The effectiveness of national audit's debt governance effects is contingent upon the quality of the auditing environment. The disclosure, defense, and prevention functions of national audit can mitigate the impact of promotion incentives on the expansion of local government debt. Consequently, establishing an audit governance mechanism for local government debt becomes imperative. Second, the indirect influence of national audit on local government debt risks stems from its supervisory effect on these officials (Liu and Lin 2012). By subjecting them to economic responsibility audits, the influence of promotion incentives on the debt of local government financing platforms is restricted. Stricter penalties for economic responsibility audits tend to reduce the incentive for promotion competition among local officials, thereby mitigating the growth rate of debt and debt risks associated with local government financing platforms (Lisic et al. 2015). National audit exerts effective controls over the incremental risks in the borrowing process of implicit local government debt, thus improving spending efficiency.
3 Theoretical Analysis and Research Hypothesis
The essence of disclosure in national audit lies in the inspection and supervision process, with the goal of identifying problems and errors while reflecting the actual situation (Roberts and Pollitt 1994). This function involves the use of legally endowed powers by the auditing authority to uncover existing issues during the supervision and inspection of the audited entity. Due to its unique independence, national audit can objectively and impartially reveal the true state of events and, through its authority, drive improvements once problems are identified (Stewart and Subramaniam 2010). The disclosure function acts as the fundamental starting point of national audit, providing a foundation for subsequent defense and prevention functions. Without a thorough analysis of the true situation through disclosure, the supervisory role of national audit would be challenging to fulfill.
National audit plays a pivotal role within the supervision system and serves as a driving force in advancing the modernization of the national governance system and governance capabilities. State audit contributes to the reduction of land capitalization in the following ways. First, it serves as a source of disclosure, exposing issues in the land capitalization process and presenting factual information about the basic conditions involved. Second, it acts as a defense mechanism by promptly implementing measures to mitigate the risks linked to land capitalization, thus minimizing economic losses. Third, national audit functions preventatively by providing audit recommendations, urging local governments to implement corrective measures, and enhancing institutional mechanisms. Fiscal transparency plays a vital role in ensuring political stability and fostering robust economic development. The level of fiscal transparency directly impacts the effectiveness of national audit roles, effectively curbing the land capitalization behaviors of local governments. In this paper, based on the disclosure, defense, and prevention functions of national audit, we propose a theoretical analytical framework that explores the influence of national audit on land capitalization.
The disclosure function of national audit impacts local government land capitalization behavior at both micro and macro levels. At the micro level, national audit is capable of reviewing documents, vouchers, records, and reports related to land contracts. This enables verification of the proper utilization of land transfer income, examination of the rationality of local financing platform management, and identification of corrupt practices among local officials (Yang et al. 2008). At the macro level, national audit has the ability to perceive the overall situation by examining details. By uncovering issues within land capitalization, it sheds light on systemic obstacles, institutional deficiencies, and management loopholes. This facilitates the stable operation of the national economy and aids in preventing and resolving economic and social risks. Therefore, the information authority of national audit is essential to fulfill its disclosure function. It serves as an information assurance mechanism by providing accurate and truthful information, alleviating information asymmetry, and effectively mitigating the risks associated with local government land capitalization through the discovery and exposure of problems.
The defense function of national audit is intrinsically connected to the disclosure and function. On the one hand, the disclosure function of national audit identifies problems, paving the way for the subsequent activation of the defense function and ensuring the proper functioning of institutional mechanisms. On the other hand, the objective and reliable evidence provided by the disclosure function serves as a basis for the effective implementation of the defense function. The defense function of national audit primarily manifests in the supervision and enforcement of corrective measures related to identified issues. It involves monitoring and inspecting the progress of rectification efforts and ensuring the full implementation of corrective tasks (Logie and Maroun 2021). Audit authorities possess the authority to demand rectification from audited entities regarding identified issues, oversee the progress of rectification, and ensure its successful completion. In severe cases, audit authorities can refer these matters to relevant departments for further action. The effectiveness of audit supervision hinges on the extent to which identified issues are rectified (Assakaf et al. 2018). Leveraging its informational advantage, national audit conducts comprehensive analyses using macro and micro-level information to uncover the underlying causes of issues, identify weaknesses in the system, and combat various challenges that arise during local government land capitalization. The defense function of national audit promotes standardized management and efficient utilization of land fiscal funds, enhances the efficiency of public fund utilization, and safeguards against wastage, irregular diversion, and misappropriation of funds. Therefore, the effectiveness of the defense function directly influences the management practices, risk mitigation strategies, internal controls, policy regulations, and accountability pertaining to local government land capitalization.
The prevention function of national audit is directly associated with the extent to which the government adopts audit recommendations (Setyaningrum et al. 2013). The effectiveness of the prevention function relies on several crucial factors. First, it depends on whether national audit proposes effective recommendations for the issues identified through its disclosure function. Second, it hinges on the prompt and complete adoption of these recommendations. Lastly, it is determined by the positive impact that the adopted recommendations have on improving the situation. The adoption rate of audit opinions amplifies the significance of national audit as it serves as a warning and deterrent signal (Blankley et al. 2015). This indicator guides local governments in addressing illegal and corrupt practices related to land issues, thereby mitigating the risks associated with land capitalization. Furthermore, the prevention function of national audit is also evident in its ability to issue warnings and exert a deterrent effect. By identifying risks and signaling potential dangers, national audit assumes a proactive role in preventing problems. It conducts in-depth investigations into widespread, tendentious, or emerging issues, delving into their background, substance, and causes. Moreover, it offers recommendations to address these issues, optimize management practices, and advance reforms, thereby preempting the escalation of problems.
In the Chinese context, the 1994 tax-sharing reform significantly altered the fiscal relationship between central and local governments, reducing the share of tax revenues allocated to local governments and creating a fiscal imbalance (Chen and Wu 2020; Ji et al. 2020; Wu 2022). To compensate for this, local governments increasingly relied on land sales and land-use rights leasing as a primary source of income (Wu 2022). This practice is unique to China, given the central government's control over land ownership, which allows local governments to use land as a financial tool (Chen and Wu 2020). National auditing plays a critical role in monitoring this land financing mechanism. The extensive use of land-based financing strategies by local governments makes audits essential for ensuring fiscal transparency, preventing corruption, and managing the growing risks associated with over-reliance on land revenue. Audits allow the central government to track how land revenues are used, ensuring that local governments do not overstate land values or engage in unsustainable debt practices. Furthermore, audits ensure that funds from land sales are allocated to legitimate public investments rather than fueling speculative bubbles or reinforcing short-term economic goals.
Additionally, the strong incentives tied to GDP growth and promotion create further incentive for local officials to maximize land revenue through land-based financing strategies (Chen et al. 2017). This system encourages the overuse of land assets as collateral for debt, which, while contributing to rapid economic growth, also raises concerns about the sustainability of local government finances (Wu et al. 2014). In this context, national audits are crucial in preventing the accumulation of unsustainable debt levels and ensuring that land financing strategies do not undermine financial transparency (Tsui 2011). National auditing helps ensure that local governments remain accountable for the management of land revenues, preventing misallocation of resources or financial mismanagement. Based on the analysis above, we hypothesize that national audit positively influences fiscal transparency.
4 Data and Research Design
This study conducted empirical analysis on a sample of 30 provinces, municipalities, and autonomous regions across China from 2009 to 2018. Due to severe data limitations, the sample excluded Tibet. The relevant data on national audits were sourced from the China Audit Yearbook, and data on land capitalization were obtained from the China Land and Resources Statistical Yearbook and the WIND database. Other data were collected from the China Statistical Yearbook and provincial statistical yearbooks.
Dependent variable. The dependent variable in this study is fiscal transparency, which is sourced from the China Fiscal Transparency Report released by Shanghai University of Finance and Economics (SUFE) for the years 2009–2018. The fiscal transparency data is collected through three main channels: (1) government disclosure information from four departments—finance bureaus, government information disclosure offices, the Ministry of Human Resources and Social Security, and the State-owned Assets Supervision and Administration Commission; (2) fiscal disclosure information gathered by reviewing the websites of provincial finance bureaus and other related departments; (3) disclosed fiscal information from published materials such as provincial fiscal yearbooks and statistical yearbooks. The collected data is categorized into nine types, including public budget, government fund budget, fiscal special accounts, state-owned capital management budget, government department assets and liabilities, departmental budgets, social insurance funds, state-owned enterprises, and public attitudes. These variables are weighted and integrated into a comprehensive fiscal transparency index, which serves as the dependent variable in our analysis. More details on the construction of this variable can be found in Deng et al. (2018).
Independent variable. In this study, we used PCA to construct an index of national audit (Audit score) by the amount of funds identified in the audit for major issues, the amount of audit recovery or loss avoidance remitted to the treasury, and the number of adopted audit recommendations, which serve as proxy indicators for the disclosure (Audit1), defense (Audit2), and prevention (Audit3) functions of national audit, respectively.2 The more significant the number of identified irregularities, the amount of audit recovery or loss avoidance remitted to the treasury, and the number of adopted audit recommendations, the stronger the disclosure, defense, and prevention functions of national audit are considered to be. These indicators are representative and can adequately illustrate the effectiveness of the disclosure, defense, and prevention functions of national audit. Considering the variations in the audit work across different regions, the above indicators are divided by the number of audit units to enhance comparability between the indicators.
Control variables. Control variables include per capita GDP, population size (Population), ratio of value added of tertiary production to value added of secondary production (Structure), per capita fiscal expenditure (Expenditure), per capita balance of financial institution loans (Loan), per capita FDI, commodity residential prices (Housing). Considering that local government's land capitalization behavior is significantly influenced by the local level of marketization, this study also controls for the marketization index (Marketization) at the provincial level, sourced from the China Marketization Index Database. To mitigate the impact of heteroscedasticity, this study applies natural logarithm transformation to these variables, except for ratio-type variables. Descriptive statistics for the main variables are presented in Table 1.
| Mean | Minimum | Maximum | STD | Median | |
|---|---|---|---|---|---|
| Transparency | 33.758 | 14.000 | 77.700 | 15.301 | 28.405 |
| Audit score | 0.000 | −1.956 | 2.133 | 0.829 | 0.006 |
| GDP | 45,359.833 | 10,814.000 | 150,962.000 | 24,366.496 | 39,153.500 |
| Population | 4546.920 | 557.000 | 12,348.000 | 2780.619 | 3843.500 |
| Structure | 1.210 | 0.527 | 5.022 | 0.672 | 1.056 |
| Expenditure | 11,279.003 | 1261.417 | 64,262.862 | 8480.926 | 9212.477 |
| Loan | 69,855.053 | 666.219 | 330,012.614 | 62,882.331 | 50,393.520 |
| FDI | 161.883 | 0.048 | 1468.689 | 207.078 | 114.451 |
| Housing | 6495.947 | 2396.000 | 37,420.190 | 4800.164 | 4952.595 |
| Marketization | 6.464 | 2.372 | 11.109 | 1.901 | 6.369 |
5 Empirical Results
5.1 Baseline Results
Table 2 presents the baseline regression results examining the impact of national audits on fiscal transparency. In Model (1), we focus solely on the national audit variable (Audit score), while Model (2) incorporates controls for various province characteristics to account for potential confounding factors. Model (3) further refines our analysis by including province and year fixed effects. The results consistently demonstrate a positive and statistically significant relationship between national audits and fiscal transparency. Specifically, the coefficient for the audit score is 0.065 after controlling for observable factors, indicating that higher audit scores are associated with increased levels of fiscal transparency. This finding supports our hypothesis that national audits positively influence fiscal transparency.
| (1) | (2) | (3) | |
|---|---|---|---|
| Audit score | 0.269*** (0.023) | 0.164*** (0.036) | 0.124*** (0.047) |
| GDP | 0.466*** (0.099) | 0.191 (0.295) | |
| Population | 0.125*** (0.048) | −1.281* (0.732) | |
| Structure | -0.024 (0.047) | 0.277* (0.155) | |
| Expenditure | 0.223** (0.092) | −0.203 (0.302) | |
| Loan | −0.116** (0.054) | −0.087 (0.142) | |
| FDI | 0.012 (0.012) | 0.000 (0.037) | |
| Housing | 0.072 (0.108) | −0.200 (0.235) | |
| Marketization | −0.095*** (0.025) | 0.035 (0.046) | |
| Province dummies | No | No | Yes |
| Year dummies | No | No | Yes |
| Adj R2 | 0.260 | 0.357 | 0.633 |
| Observations | 300 | 300 | 300 |
- Note: Values in parentheses represent standard errors; ***, **, and * denote significance levels at 1%, 5%, and 10%, respectively.
5.2 Robustness Checks
We conducted two robustness checks to validate our findings. We conducted two robustness checks to validate our findings. First, our initial analysis utilized the amount of audit recovery or loss avoidance remitted to the treasury as a measure of the defense function of national audits (Audit2). As a robustness check, we alternatively measured it using the total amount of funds remitted to the treasury. This alternative measure captures the overall financial impact of national audits, as it accounts for all funds recovered, regardless of the specific category of financial irregularity. A higher amount of funds remitted to the treasury suggests enhanced effectiveness in identifying and rectifying financial mismanagement, thereby strengthening the defense function of national audits. Similarly, we employed PCA to construct a revised index of national audit (Alternative audit score). Table 3 presents the results from the baseline regression utilizing this alternatively defined variable of national audit, and the findings remain consistent.
| (1) | (2) | (3) | |
|---|---|---|---|
| Alternative audit score | 0.203*** (0.022) | 0.086*** (0.026) | 0.065* (0.034) |
| Control variables | No | Yes | Yes |
| Province dummies | No | No | Yes |
| Year dummies | No | No | Yes |
| Adj R2 | 0.185 | 0.333 | 0.628 |
| Observations | 300 | 300 | 300 |
- Note: Values in parentheses represent standard errors; *** and * denote significance levels at 1% and 10%, respectively.
Second, endogeneity issues arise when examining the effect of national audits on fiscal transparency primarily due to omitted variables and reverse causality. Omitted variable bias occurs when unobserved factors, such as political will, administrative capacity, or historical governance practices, influence both the implementation of national audits and the level of fiscal transparency, leading to spurious associations. Additionally, reverse causality may be present if greater fiscal transparency incentivizes stronger national audits, as governments may seek to enhance their credibility and accountability in response to public demand for transparency. We used the instrument variable (IV) approach to ease concern on endogeneity issues.
In March 2014, Premier Li Keqiang made a significant policy declaration in the government work report, explicitly calling for a comprehensive audit of national land transfer revenue and expenditure. This directive catalyzed the State Council to issue a detailed work plan for the audit, which mobilized over 24,000 auditors from various levels of audit agencies across the nation. From August 2014 onward, these auditors conducted thorough examinations of land transfer revenue, expenditure, and land protection practices across 29 provincial-level administrative regions, 200 prefecture-level cities, and 709 counties. We identified the National Audit Office's audits of land transfer revenue and expenditure as an exogenous shock on national audit. Specifically, an IV is constructed by interacting the total area of land parcels transferred by local governments with Post, a dummy variable indicating the period after 2014. Table 4 presents the results from the IV approach. The first-stage results indicate that the IV is significantly associated with the endogenous variable (Audit sore), thereby providing supportive evidence for the validity of the IV. In the second stage, the results further reinforce the finding that national audits promote fiscal transparency.
| (1) First stage | (2) Second stage | |
|---|---|---|
| Post2014 × Supply | 0.058*** (0.009) | |
| Audit score | 0.465*** (0.095) | |
| Control variables | Yes | Yes |
| Province dummies | Yes | Yes |
| KP-LM-value | 35.492 | |
| KP-Wald F-value | 44.102 | |
| p-value | 0.000 | |
| Observations | 300 | 300 |
- Note: Values in parentheses represent standard errors; *** denotes significance level at 1%.
5.3 Heterogeneity Analysis
We have observed a positive effect of national audit on fiscal transparency. In this section, we further explore whether the effect varies across regions and different types of national audits. First, we investigate whether the effect of national audits on fiscal transparency differs between the eastern and central-western regions. Table 5 presents the results from the baseline equations in subsamples from these two regions. The findings indicate that the impact of national audits on fiscal transparency is significant in eastern regions, while it is not significant in central-western regions. Several factors may account for this regional disparity. Eastern regions, often characterized by more developed economies, greater urbanization, and stronger governance frameworks, may possess the institutional capacity and political will to implement and respond to national audit findings effectively. In contrast, central-western regions may face challenges such as limited administrative resources, weaker institutional frameworks, and varying levels of public accountability, which can hinder the effective implementation of audit recommendations and diminish their impact on fiscal transparency. Additionally, socioeconomic factors, such as higher levels of corruption or political patronage in central-western regions, may further obstruct the positive effects of national audits. This disparity highlights the importance of contextual factors in understanding the relationship between national audits and fiscal transparency.
| Eastern | Central-western | Eastern | Central-western | |
|---|---|---|---|---|
| (1) | (2) | (3) | (4) | |
| Audit score | 0.191** (0.088) | 0.094 (0.058) | ||
| Alternative audit score | 0.142** (0.058) | 0.053 (0.044) | ||
| Control variables | Yes | Yes | Yes | Yes |
| Province dummies | Yes | Yes | Yes | Yes |
| Year dummies | Yes | Yes | Yes | Yes |
| Adj R2 | 0.625 | 0.627 | 0.618 | 0.625 |
| Observations | 110 | 190 | 110 | 190 |
- Note: Values in parentheses represent standard errors; ** denotes significance level at 5%.
Second, we investigate whether the effect of national audits on fiscal transparency differs across regions characterized by varying levels of land finance. Following the 1994 tax-sharing reform—which significantly reduced local governments' revenue-sharing ratios—land transfer revenues have emerged as a vital off-budget financing mechanism amid rapid urbanization. Although land is a valuable asset, aggressive leasing practices, often spurred by local officials' promotion incentives, tend to generate unsustainable debt levels. Enhanced fiscal transparency, therefore, plays a crucial role in monitoring these practices and restraining excessive borrowing through improved accountability and oversight. To explore this dynamic, we divide our sample into regions with high and low land finance based on the median land transfer revenue and conduct separate regressions for each group. As shown in Table 6, national audits significantly improve fiscal transparency in high land finance regions, whereas their impact is not statistically significant in low land finance regions. This regional heterogeneity likely reflects enhanced public scrutiny and stronger institutional oversight in areas where land transactions contribute substantially to local government revenues. These findings align with the broader institutional context of China's land revenue system, which has underpinned urban development and local governance since the 1994 reform. Subsequent reforms—such as the 1998 urban housing system reform and the 2003 policy on land bidding, auctioning, and listing—further entrenched land as a key source of financing (Lin 2015). In high land finance regions, local governments have adopted sophisticated strategies to maximize land value, including offering preferential industrial land prices to attract capital and create employment (Wu et al. 2014) while restricting commercial land supply to drive up prices (Liang et al. 2016). Consequently, land transfer income has become not only a major revenue source but also a fundamental tool for debt financing (Chen and Wu 2020). The strategic use of land as a credit foundation has been central to China's economic growth and structural transformation. Local governments leverage their land assets to promote GDP growth—a practice further incentivized by promotion criteria linked to economic performance (Wu 2022; Chen et al. 2017). However, the extensive reliance on land revenue has also given rise to land-based finance, wherein local governments mortgage land or use it as collateral for urban investment bonds via financing platform companies (Tsui 2011). While this model has substantially contributed to capital accumulation and growth, it simultaneously introduces potential risks to government debt and regional financial stability.
| High land finance | Low land finance | High land finance | Low land finance | |
|---|---|---|---|---|
| (1) | (2) | (3) | (4) | |
| Audit score | 0.131* (0.074) | 0.111 (0.068) | ||
| Alternative audit score | 0.162** (0.066) | 0.043 (0.045) | ||
| Control variables | Yes | Yes | Yes | Yes |
| Province dummies | Yes | Yes | Yes | Yes |
| Year dummies | Yes | Yes | Yes | Yes |
| Adj R2 | 0.609 | 0.648 | 0.620 | 0.644 |
| Observations | 150 | 150 | 150 | 150 |
- Note: Values in parentheses represent standard errors; ** and * denote significance levels at 5% and 10%, respectively.
Third, we investigate whether the effect of national audits on fiscal transparency varies across different types of national audits. Table 7 presents the results from Equation (1) using Audit1, Audit2, and Audit3 as independent variables. Our findings indicate that the positive impact of national audits on local fiscal transparency is primarily driven by the disclosure and defense functions.
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Audit1 | 0.068* (0.040) | 0.066* (0.040) | ||
| Audit2 | 0.036** (0.014) | 0.050** (0.021) | ||
| Audit3 | 0.026 (0.102) | −0.014 (0.102) | ||
| Control variables | Yes | Yes | Yes | Yes |
| Province dummies | Yes | Yes | Yes | Yes |
| Year dummies | Yes | Yes | Yes | Yes |
| Adj R2 | 0.628 | 0.633 | 0.624 | 0.633 |
| Observations | 300 | 300 | 300 | 300 |
- Note: Values in parentheses represent standard errors; ** and * denote significance levels at 5% and 10%, respectively. Audit1 represents the amount of funds identified in the audit for major issues, reflecting the disclosure function of national audits. Audit2 represents the amount of funds remitted to the treasury, reflecting the defense function of national audits. Audit3 represents the number of audit recommendations that have been adopted, reflecting the prevention function of national audits.
6 Conclusion
This study examines whether national audits influence local fiscal transparency in China. Our findings demonstrate that national audits play a significant role in enhancing fiscal transparency, particularly through their disclosure and defense functions. In addition, the impact of national audits varies across regions, with stronger and statistically significant effects in eastern regions and areas with high land finance, while no significant effect is observed in central-western regions or regions with low land finance. These results suggest that the effectiveness of national audits in promoting fiscal transparency depends on regional economic development and local government financing patterns.
The findings of this study have important policy implications. First, national audits play a crucial role in enhancing fiscal transparency, primarily through their disclosure and defense functions. The disclosure function promotes transparency by making audit results publicly available; therefore, policymakers should improve dissemination mechanisms to ensure these results are accessible and clear. The defense function compels local governments to act on audit recommendations, underscoring the need for stronger enforcement mechanisms, such as follow-up procedures, to hold officials accountable for noncompliance. Second, the study highlights that audits are more effective in eastern regions and areas with high land finance, while their impact is weaker in central-western regions or areas with low land finance. This suggests a need for region-specific policies. In regions where audits are more effective, such as the eastern areas, policymakers should consider expanding the scope and frequency of audits. Conversely, in central and western regions, efforts should focus on strengthening local governance and enhancing audit capacity. Finally, the study reveals that national audits have a more pronounced effect in areas with high land finance, while their impact is limited in regions with low land finance. Thus, regions with high dependence on land finance should prioritize diversifying revenue sources and reducing reliance on land sales.
Author Contributions
Zhuo Chen: conceptualization, data curation, formal analysis, funding acquisition, methodology, writing – original draft. Mingzhi Hu: conceptualization, funding acquisition, investigation, writing – review and editing. Both authors contributed equally to this work.
Acknowledgments
We would like to thank Prof. Shihe Fu and two anonymous reviewers for their helpful comments. This study was funded by the National Natural Science Foundation of China (No. 72104088, No. 72274176, No. 72074097, No. 72174181) and the National Social Science Foundation of China (No.20BGL225).
Ethics Statement
The authors have nothing to report.
Conflicts of Interest
The authors declare no conflicts of interest.
