Research On Formation And Effectiveness Of Audit Committee In Listed Company

Audit committee is independent special committee attached to board committee. The audit committee is deemed as a mechanism that can improve the quality of reported financial information and ensure the corporation accountability performed perfectly. The responsibilities of audit committee include: valuating the corporation internal financial control system and risk management system; supervising corporation financial report system, internal audit and external audit. In the listed corporation of West Country, the audit committee has been well developed into an effective mechanism that can protect the interest of shareholder effectively. In 21st century, the public pay more attention to audit committee after series of uncovered financial and audit frauds in U.S. and EU. As adjustments to the change of economic environment, the SEC of U.S.A. and U.K. have put out codes to improve the statue of audit committee within given corporation governance framework and to enrich the substance of audit committee. In china, the SEC, accountants, managers and expertises have paid much attention to the development of audit committee. A lot of listed corporations have set up audit committee. However, there are many environmental differences in economic sense between China and West Country. In U.S. or U.K., the shareholders of listed corporation disperse utmostly. Audit committee must be formed to alleviate the conflicts between shareholders and managers. In China, ownership structure of listed corporation is concentrated comparatively, and listed corporation set up audit committee voluntarily. Based on the characteristics of listed corporation ownership structure in china, this dissertation focuses on the factors which influent the formation and the effectiveness of audit committee.The main content of this paper can be divided into two parts. Based on the agency conflict between the controlling shareholder and other minority shareholders, the first part investigate the factors which influent audit committee formation in listed corporations. We find that the controlling shareholder is more likely to use their power to hold up the formation of audit committee when they have absolute control, thus incentives to entrench the company. The more balanced ownership can improve corporate governance. The greater the shares held by non-controlling shareholders, the higher the likelihood of the formation of audit committee. We also find the likelihood of the formation of audit committee declines significantly when the shares held by the largest shareholder are non state-owned shares.The second part focuses on the effectiveness of audit committee of listed corporations in Chinese stock market. We provide empirical evidences about audit committee effectiveness from three perspectives, including earnings management, exterior auditor change and audit fees. The results are as followed:(1)A negative relation is found between the existence of audit committee and discretionary accruals. These results suggest the audit committee is an effective corporate governance mechanism. A negative relation is also found between audit committee size and discretionary accruals;(2)There is significant negative relationship between the existence of audit committee and auditor change, which suggests that audit committee help to resolve auditor-client disagreements on applying GAAP;(3)There is significant negative relationship between the existence of audit committee and audit fees, which suggests that audit committee can improve internal control environment.Based on the theory of agency conflicts between the controlling shareholder and other minority shareholders, we find firstly the factors that influent audit committee formation in listed corporation. This research therefore contributes to the theories of ownership structure and corporation governance as well, and helps us to understand how ownership structure imposes on the conducts of corporation. On the other hand, our study analyzes the effectiveness of audit committee more comprehensive than before. From three perspectives, that is earnings management, exterior auditor change and audit fees, this study is the first one to provide evidences to support the view that audit committee in listed corporation are indeed effective.