Economic Analyses Of CPA Audit System

1It has been distinctively put forward in the reports of Fourteenth and Sixteenth National Congress of the Communist Party of China the mission to establish and perfect the socialist market economy system. As a kind of intermediate system,CPA audit system is one important kind of infrastructure of market economy system. It is internal economic monitor system of market economy, and at the same time a mechanism that extends co-operations between people and prevents the capital market from fraud. Presently there have appeared many financial frauds and illegal practices concerning CPAs, and CPA audit system has encountered problems both in China and worldwide. These problems expose flaws of infrastructure of market economy system, in particular CPA audit system's drawback, and also expose far from enough research on auditing theories. This dissertation, basing on theories and approaches of institutional economics, makes a detailed study of CPA audit system's origin, properties, endogenous factors, functions, and conditions of functioning. It also gives a review of the flaws of China's CPA audit system, and puts forward measures and suggestions for its further improvement. This study shall deepen and enrich the theory of economic coordination, and contribute to the perfection and completeness of property rights theory, government function theory, and market order theory. It will help the perfection process of socialist market economy system and the realization of fair dealings. This dissertation is composed of six chapters. Chapter One Literature Review and Comments The thesis begins with literature review and comments from a comprehensive research perspective. Then it goes into agency economics, signaling theory, and credit mechanism theory to review and comment on their applications in CPA audit system research. Theories of contract economics are usually applied to present research on CPA audit activities. Problems, however, exist within the research because of theory limitations of contract economics and its disperse application to CPA audit studies. Firstly, contract economics has CPA audit activities completely put into the market and emphasizes equal contractual relations within the market while neglects the property of quasi-public product provided by CPA audit system. Secondly, contract economics just emphasizes the service of audit to contracting parties inclusive of the enterprise management, while neglects the fact that CPA audit system also serves non-contracting parties. Thirdly, some of the conclusions basing on contract theories are also of suspicion. This thesis has found that current research work lacks overall and internal structural studies of CPA audit system starting from theories of institutional economics. Neo-institutional economics, game theory and information economics can provide reasonable explanations to economic systems, and as economic analytical tools they can also explain CPA audit activities effectively. This study shall make use of these analytical tools together with some other analytical tools to conduct an in-depth research into CPA audit system. Chapter Two Economic Analyses of the Origin and Properties of CPA Audit System In light of historical materialistic views, I begin my study from the origin of CPA audit system since I believe that historical beginning is also the logicbeginning of research work. In this chapter I first look back upon the historical background and the process of CPA's emergence in the UK, the US and China. Basing on theories of institutional economics I analyze the theoretical foundations for the emergence of CPA audit system and its economic properties. Finally there is a generalization of those intrinsic qualities of CPA audit system. This study puts forward a viewpoint of the hallmark of the emergence of CPA audit system: It is believed that the emergence of CPA audit activities does not mean establishment of the system. Only when CPA audit activities can adjust general economic activities, affect the overall allocation of resources, and serve all the parties concerned as a kind of legal requirement, can CPA audit system be established. According to this standard, Company Act of 1862, Stock Act of 1933 and China's 1998 divorce and re-organization of accounting office are the respective hallmark of CPA audit system'emergence in the UK, the US and China. Qualities of CPA audit system are one kind of infrastructure of market economy system, and a kind of quasi-governmental economic monitor mechanism that makes up for price mechanism's failure. CPA audit system is the game equilibrium of prevention of finance fraud by participants in the capital market. It is universally applicable to economic activities, and the service provided is a kind of quasi-public product. Chapter Three Component Factors of CPA Audit System Upon the formulation of qualities of CPA audit system, this third chapter goes further into the inner part of the system, and studies its endogenous factors. Drawing on definitions of institutional economics about "system,"the paper makes a deduction of the concept and factors of CPA audit system. It is believed that CPA audit system is a self-maintained system of common belief in prevention of economic fraud in capital market games. The essence of CPA audit system is to display the game equilibrium of participants in the capital market though the concentration of the audit report.CPA audit system includes six factors: 1. Participants in the system, including key participant, the CPA professional group who is independent audit subject; the enterprise management who is the object to be audited; the target of audit service, exchangers of capital commodities that include real owners of commodities of capital, potential sellers of commodities of capital (possessors of a certain part of commodities of capital), potential buyers of capital commodities; government sectors; legal sectors; and other interested parties such as banks, organizations of creditor-debtor relations, employees, consumers, etc. 2. Common belief in the system. Due to CPAs'involvement in capital market dealings, participants form the common belief of elimination and prevention of fraud. Through repeated games, this common belief gradually becomes stable, and any participant who deviates from it will be punished. At last CPA audit system comes into being. 3. Game rules. Since CPAs'participation in the games in capital market, they have observed the game rule of presenting fair accounting information. This rule gradually evolves into a series of explicitly stated stipulations inclusive of independent audit criteria. However, game rules are not subjective or exogenous, but results of strategic interactions among participants, and they can be self-implemented. 4. Stimulation mechanism. Audit fees are the prerequisite for CPA audit system's sound functioning. As audit activities of CPAs are not sheer market activities, audit fees are simply necessary condition to motivate the system to function properly, not sufficient condition. There should be non-material factors in the stimulation mechanism of CPA audit system, such as high social status, good reputation and the honor of social responsibility. 5. Binding mechanism. This kind of mechanism, on the one hand, comes from the exterior, from penalties of legal responsibilities. On the other hand, the binding power comes from within, from rational understandings of their own activities by the CPA industry, and from the maintenance of their reputation. 6. General symbol. Audit report is the ultimate result of CPA auditing, and the general symbol of CPA audit system. It delivers the signal of price correction to the market inconcise forms. These six factors constitute the internal structure of CPA audit system, and also determine if this kind of system can function normally. Chapter Four Functions and Effects of CPA Audit System Every system has its particular internal function and external effect. The fourth chapter begins with analyses of institutional economics about system functions. It first examines social functions of CPA audit system from theoretical perspectives. Then the chapter investigates into the function of China's CPA audit system through empirical analysis. Through descriptive statistics of audit opinion types and market reaction test of audit opinion, the current condition of China's audit system is revealed. Generally speaking, systems have four kinds of functions: effective coordination and trust; protection of individual's private realm; prevention and dissolvement of conflicts; limitation of rights abuse of to offend others'freedom. Functions of CPA audit system include: effectively coordinating conflicts among interested parties in the capital market so as to prevent and dissolve clashes; exposing, rectifying, and preventing mistakes and frauds in accounting information to lower or share economic risks; delivering a fair signal of accounting information effectively so as to defend against advantaged groups from power abuse. China's CPA audit system plays a very important role in making use of foreign capital, reforms of state-owned enterprises, and capital market development. It plays an especially significant part in the stock market where it acts as a kind of infrastructure for stock exchanges. Although there have appeared a lot of problems, they still have their distinctive voice and daring to say "no."The system has grown up through turns and twists which can be witnessed from descriptive statistics of audit opinion. At the same time I also discover some problems with China's CPA audit system, and market reaction to audit opinion is not significant. Chapter Five Analyses of Conditions for CPA Audit System to Function ProperlyIt requires certain practical conditions for an economic system to function properly. In this fifth chapter, taking signaling theory and market governance theory of institutional economics as the analytical framework, I analyze the technical and social conditions for CPA audit system to function properly. CPA audit is, first of all, a kind of professional business. So someone who does not have professional knowledge or specialized training isn't competent for this job. Meanwhile the audit business of CPA is highly independent, which means they must review objectively and impartially, and present the opinion fairly, on behalf of the public. Therefore, if CPA audit system is to function properly, the CPA professional group should be guaranteed professional competence on the one hand; and CPAs should be independent on the other hand. CPA audit shall not be governmental or monopolistic, but should be independent activities. The independence of CPA auditing is a kind of system arrangement within market economy. It is binding power and restraint on CPAs'professional activities exerted by market governance structure and a defined area of audit activities of CPAs. Upon rational perception of their position, CPAs, free from compulsion of any interested group, drawing on their expertise and independent judgment, reach independent opinions. This intrinsic free state complies with the requirement of social public interests. Chapter Six Problems with China's CPA Audit System and Directions for Improvement Basing on previous chapters, the sixth chapter carries out theoretical research and questionnaire analysis about China's CPA audit system, and has found certain defects and problems of the system. Targeted against these problems, I put forward policy suggestions in the hope of perfecting China's CPA audit system. This study has found the aggregate that constitutes participants of CPA audit system is still imperfect, and difficult to produce common belief in the prevention of financial frauds. There are also many imperfections in the legal...