| The impact of investor protection is wide and great. It affects enterprise's agency problem and the development of capital market. Ultimately, it affects the development of a country's economy. The development of a country's economy depends on the healthy development of the enterprises in this country. Only when entrepreneurs can raise their operating capital, they can create wealth for the society. Only when capital and other economic resources are reasonably distributed among the enterprises, the wealth of our society can be maximized. However, only when people are willing to invest their capital on enterprises in exchange for future investment returns, entrepreneurs can raise capital. Obviously, if there is no investor protection measures to protect investors, the enterprises will not return the money to investors or provide return to the investors. So, investors will not invest on the enterprises and the enterprises can not raise money to create wealth. The economy will not develop. This potential market failure requires investors to be protected in order to make financing possible.Certificated Public Accountants (CPA) audit system (or independent audit system) is an important infrastructure of market economy system .Theoretical study (AAA, 1973; Watts & Zimmerman, 1986) indicates that CPA) audit is an effective means to protect the interests of investors after the emergence of Corporation limited and capital markets. CPA audit system has the function of effectively protecting property rights, preventing and resolving conflicts, enhancing coordinating and mutual trusting and inhibiting powerful group. When this function interacts with real economic environment, the result is the role of Certificated Public Accountants (CPA) audit system. CPA audit system has been proved to have played an important role in western economically developed countries. Although there have been many cases which have destructed the system, the status of CPA audit system still has not been shaken. On the contrary, these cases make CPA audit system improve constantly (Li-Rong Han, 2005). The emergence of the capital market in China provides CPAs with a broad market. The development of the capital market promotes the development of CPA audit industry. As joint-stock companies, listed companies have the most thorough separation of powers and the most stakeholders of economic interests .It is the most meaningful and responsible field where CPAs can play a role in.According to LLSV's (1998) analytical framework of investor protection, in the areas where investor protection is weaker, independent audit may become alternative mechanism to compensate for the negative impact of weak investor protection (FRANCIS, KHURANA, PEREIRA, 2001; Fan and Wong, 2005).Chinese security market has the typical characteristic of the emerging markets. Compared with the development of securities markets, the level of development of Chinese legal provisions and law enforcement is relatively lower (Pistor, Xu, 2004). Legal protection for Chinese small and medium-sized investors is generally poor. At the security market level, there is still inadequate means to protect investors. At the company level, the overall level of corporate governance of listed companies in China is low. Protection to investors is still very poor. This paticular background provides us opportunity to study if independent audit is a substitute mechanism to compensate for the weak investor protection.In emerging markets like China, the topic that independent audit could play a role in the protection of investors is still a controversial topic. There is still contradiction in theories and evidences. Whether or not independent audit has played a role in investor protection is still a problem which needs to be confirmed.The basic idea of this paper is: First of all, theory of investor protection is generalized. On this basis, the author constructed independent audit investor protection theory. Then, this paper tested the effect of independent audit on investor protection with data from Chinese stock market and listed companies.Lastly, the author summarized the whole paper and made recommendations.The significance of this studyThe significance of this study is as follows:Firstly, to deepening research on the role of independent audit in China. This paper can provide direct evidence about the role of independent audit by testing the effect of "big four" accounting firms, domestic large accounting firms and audit opinions on investor protection.Secondly, the significance of the study is to deepening research on Chinese investor protection constitution. LLSV (1998), Francis etc. (2001) speculate that high-quality audit can be used as a alternative mechanism to ease enterprise agency conflict in the environment where legal investor protection is weak.Our country's judicial system is not yet perfect. Especially, weak judicial enforcement mechanisms led to weak investor protection. Rules or contractual arrangements can not be effectively implemented. There's phenomenon of soft legal constraints (He Jian-Gang, Liu Feng, 2006). Can independent audit act as an alternative mechanism of law to provide protection for Chinese investors? This paper has empirically tested the hypothesis.Thirdly, it is helpful to propose more practical suggestions for improvement to test the role of CPA audit system from the perspective of investor protection.The fundamental task of CPA audit is to protect outside investors. Therefore, it is helpful for the improvement of CPA audit system and its environment to test the effect of CPA audit system on investor protection, to find out the problems and to analysis the influencing Factors and propose targeted recommendations.This paper is composed of six chapters.Chapter 1 Introduction Firstly, the author introduced the background of this research, raised questions which need to be tested, the theoretical and practical significance of these topics. Then the author made a literature review, the research ideas, research design, and the structure of the paper. Finally, the author noted the innovation and shortcomings of this research.Chapter II Theoretical Analysis On the Role of Independent Audit upon Investor Protection In this chapter, the author defined investors, the right of investors and the role of independent audit in investor protection. Then, the author explained the motives of independent audit to protect investors, pointed out that investor protection is the root cause of independent audit to be born and develop. Independent audit has the function to protect investors. Then, the author discussed the effect of independent audit to protect investors, how to measure the effect, which factors affect the effect. The author proposed measures to strengthen the role of independent audit to protect investors.Chapter III Independent Audit to Protect the rights and interests of Stockholders -- Evidence from Agency Costs of Equity At the corporate level, the issue of investor protection turns into the issue of agency problems. The issue of investor protection turns into how to reduce agency costs. This chapter tests the relationship between the scale of accounting firms and equity agency costs, the relationship between non-standard audit opinion and agency costs with a measure of relative overhead expense and the ratio of annual sales to total assets. This paper assumes that international Big Four accounting firms and domestic"Big Eight" accounting firms can reduce agency costs because their audit quality is higher. This paper also assumes that non-standard audit opinion can reduce agency costs because non-standard audit opinion is external pressure which forces the management to reduce agency costs. Empirical evidence shows that audit opinion can promote agency efficiency while the effect of international Big Four or domestic"Big Eight" on investor protection is not significantly better than those small firms.Chapter IV Independent Audit to Protect the rights and interests of Creditors -- Evidence from Agency Costs of Debt Creditors are important investors of companies. Protection of their interests is important to the healthy development of the nation's economy. According to the theoretical framework of agency theory, due to the inconsistency of interests between insiders and outside investors, insiders will be against the interests of creditors and agency costs of debt occurs.Independent audit is the mechanism to reduce agency cost of debt. Audited financial statements can be used to monitor the debt contract (Watts and Zimmerman, 1986), which played a role in creditor protection.This paper holds that high quality audit means better supervision to enterprises and will effectively reduce the risk of information. Therefore, as an important creditor, the bank will charge lower interest rates of loans, commercial creditors would take more lenient credit policies , which will lead to declining of interest rates. So, rate of interest expense is a useful variable to represent agency costs of debt. Therefore, agency costs of debt are negatively correlated with high quality audit.Non-clean audit opinion implicates amendment to the quality of accounting information. Its warning effects are a direct manifestation of the utility of independent audit. This paper believes that non-clean audit opinion is a signal to creditors. If the commercial banks can respond to this signal, commercial banks can take self-protection measures: to increase interest rates of loans or require more stringent credit conditions or recover their money earlier. Commercial debt creditors will recover the money, too.Empirical tests found that listed companies audited by international "Big four" didn't have significantly lower agency costs of debt than those audited by small accounting firms. On the contrary, they had higher agency costs of debt. Listed companies audited by Chinese "top five"didn't have significantly lower agency costs of debt than those audited by non-Chinese "top five"accounting firms, either.However, the hypothesis that non-clean audit opinion plays warning role is confirmed: non-clean audit opinions of the previous period are positively relates to the company's interest payments and rate of interest payments, which means the creditors can identify CPAs'warning signal and take appropriate self-protection measures. However, non-clean audit opinion couldn't affect the scale of the company's liabilities.Chapter 5 The Effect of Independent Audit on Reducing Investors'Information Risk - Evidence from Initial Public Offering of SharesDid external investors recognize the role of independent audit on investor protection and make corresponding reaction at the market level?From the point of view of investor protection, accounting firms with higher reputation have developed more stringent standards and long-term followed them in the process of producing and assuring information. Therefore, they can provide higher quality service. Higher-quality audit service means more reliable financial data and the information asymmetry between the corporation and investors will be alleviated. Therefore accounting firms with higher reputation can provide stronger protection with investors. Then investors will request lower rate of return when buying shares of initial public offerings. That is, high-quality audit can reduce the degree of underpricing of initial public offering of shares more effectively. The author holds that the existence of auditors'reputation shows that investors have recognized the role of independent audit to protect them.This chapter tested the relation between the underpricing of initial public offering and the reputation of accounting firms in Chinese A-share stock market from the beginning of Chinese A-share stock market to year 2002. The author found that the international "big four" accounting firms can significantly reduce the underpricing of initial public offering of shares, while the "domestic five" accounting firms couldn't. This shows that the reputation of international "big four" accounting firms was recognized by investors in the emerging markets like China and domestic big accounting firms failed to establish their reputation.Chapter VI Conclusion In this chapter, the author summarized the findings of this paper, explained the empirical results, put forward policy proposals, proposed the innovation and shortcomings of this paper and the direction of further study.Main viewpoints of This Paper The basic viewpoints of this study are as follows:Firstly, independent audit has the function to protect investors. Independent audit protect investors by supervising, attesting, evaluation and controlling, which promote managers'accountability to be fully and effectively performed. Therefore, independent audit can play a role in investor protection.Secondly, investor protection is the root cause of independent audit to be born and develop. The demand of investors is the basis of independent audit to survive. It is CPAs'target to meet the expectations of investors.Thirdly, independent audit is attesting mechanism of information disclosure system. Independent audit can improve the quality of information and reduce the information risk of investors to protect the investors'right to know.Fourthly, compared with general-quality audit, high-quality audit gives stronger protection to investors. High-quality audit means enhanced monitoring force, which will inhibit moral risk of operators to a certain extent. The in-service consuming will decline and the losses of efficiency will be lower. Agency costs of equity will decline and agency efficiency will be higher.Fifthly, audit opinions can play a role in investor protection. First of all, non-standard unqualified audit opinions are pressure on the enterprise managers and can force the enterprise managers to work hard to reduce agency costs. Secondly, non-standard unqualified audit opinions are signals of warning which help creditors to take timely measures of self-protection.Innovation of This StudyFirst of all, this study researched the role of independent audit from a new perspective of investor protection. Existing auditing theories and methods hold economic information system and how to control the operator's specific economic activities as the main objectives. The effect of independent audit on investors is not the focus of attention. It is a new attemption to study the role of independent audit in investor protection.Secondly, this paper analysed and interpreted the effect of independent audit on investor protection by using the conception of accountability. By linking the function of independent audit with investor protection, the author explored the research by referring to contract theory, theory of investor protection, theory of agency, theory of corporate governance etc. This is not only development of auditing theory, but also development of theory of investor protection.Thirdly, the author tested the effectiveness of independent audit on investor protection by using empirical research methods and there have been new findings:â…°. The international "big four" accounting firms didn't give outside investors more protection. This is reflected in: Agency costs of equity and agency costs of debt of listed companies who hired the international "big four"accounting firms are higher than those who hired non- international "big four" accounting firms.â…±.There is no significant difference between the effects of big domestic accounting firms and small firms to protect investors. This is reflected in: Agency costs of equity and agency costs of debt of listed companies which were audited by domestic large accounting firms were not significantly lower than those who hired small firms.â…². Audit opinion can play a role in investor protection.â…°. CPA issued non-clean audit opinions to warn operators or investors when they found agency costs were high.â…±. Non-clean audit opinions can constraint agents'behavior and impel them to improve efficiency.â…². Non-clean audit opinions of last period are positively related to creditor's self-protective action. This proved that audit opinions are warning signal to protect investors.â…³. International "big four" accounting firms got higher level of recognition by investors.Along with the development of Chinese securities market, the reputation effect of international "big four" gradually become apparent, while "domestic big five" accounting firm's gradually lost their reputation, which suggests that investors believe that the international "big four" can provide better protection. However, the results of empirical test showed that the international "big four" can not reduce agency costs, which means the international "big four" did not protect investors. This is a strong contrast.Summarizing findings of this research, the author concluded that independent audit can play a role in investor protection in emerging markets such as China. Yet big accounting firms didn't give better protection to investors than small firms.
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