| Recently, investors and capital markets all over the world are mislead by many of the financial statement restatements, which has resulted in the inefficiency of resource allocation. The financial statement restatements, to some extent, have shaken the confidence the investors have on the financial reporting system. As a correction mechanism for false financial statement, financial statement restatements reflect the strengthening of the administration as well as the worries on the quality of financial statement. There are many institutional and practical issues worth further studying.In our capital market study, we focus more on the fraud of financial statement, while the financial statement restatements get little attention. Although it is more directly if we analyze the financial statement information disclosure from the financial statement fraud perspective, the conclusions from these studies have its limitations, not only because the confirmation of the fraud takes time and legislative procedures, but also because the fraud itself is an extreme of the poor-quality financial statement. The occurrence of large amount of the financial statement restatements gives us a new starting point to study the improvement of the financial statement quality.The basic idea of this paper is as follows. Based on an analysis of the cause of financial statement restatements and its characteristics, its current problems, and its development trend, the paper indentified the impacts of the corporate governance and independent audit have on the detection and prevention of financial statement restatements, on which the recommendations on the governance of financial statement are reached.Therefore, this paper is divided into three parts, eight chapters. Their contents are as follows:Part I, the Introduction. Firstly, the background, significance and the objectives of this research are introduced. The research issues are raised based on this introduction. Then, the literatures about the past study on the financial statement restatements are reviewed. They are mainly focusing on the cause of financial statement restatements, the relationships between the financial statement restatements and the characteristic of corporate governance, or the relationship between financial statement restatements and the quality of auditing, as well as other field of financial statement restatements study. Finally, the research content, framework and method were stated.Part II, based on an analysis of the cause of financial statement restatements and its characteristics, its current problems, and its development trend, the paper indentified the impacts of the corporate governance and independent audit have on the detection and prevention of financial statement restatements. This part includes chapter 1 to chapter 7.Chapter 1, The Introduction of Financial statement restatements. In this chapter, the writer defines the concept of financial statement restatements. Financial statement restatements are procedures taken by an enterprise to correct and disclose the financial statement of the previous periods. Based on the comparison of relative concepts, it is made clear that the substance of the financial statement restatements is the correction of errors and frauds in the financial statement previously disclosed, so that the reliability and the truthfulness of the financial statement can be retained. The financial statement restatements are rooted from the errors and frauds in the financial statement. The existence of the errors and frauds in the financial statement weakened its reliability. The contract theory from the information asymmetry has explained the problem that the agent would disclose the misleading financial statement. From one side, the financial statement restatements reflect the potential problems existed in the quality of financial reports. On the other side, as a correction mechanism for false financial statement, financial statement restatements communicate the extent, reason, and impact of the errors and frauds incurred to the investors. The companies who have the financial statement restatements may suffer from the losses. However, this should be the price paid for their errors.Chapter 2, The Institutional Background of Financial statement restatements. The institution of the financial statement restatements is introduced from the perspectives of its content, method and information disclosure. And this is compared to the related standards under the US GAAP and IAS. From 1998 to 2006, the regulations on the financial statement restatements have changed, and converged to the international standards. The disclosure requirement has also been improved, with the strict provisions made by accounting standard and the China's Security Regulatory Commission. In addition, the auditing standards, the law of security exchange, and the law of corporation have provided important background material for the relative governance.Chapter 3, Practical Investigation of Financial statement restatements (Part I) - the Basic Characteristics of the Financial statement restatements Companies. This chapter analyzes the basic characteristics of financial statement restatements companies according to the data which describe the companies involved in the significant accounting errors from 2002 to 2006. The description is done from the following perspectives: the recognition of the restatement figures and reasons, the one who raising the restatement, the audit opinion on the financial statement restatements company, and the category of the financial statement restatements companies, the location, the information quality, and the direction of the restatement, the auditor changes of the financial statement restatements companies. From the figure perspective, the numbers fluctuate during the years, basically decreasing. From the reasons of the restatement, the main reasons are: tax accounting, false calculation (other than the tax accounting), the misuse of the related policies, contingent and other matters, most of which related to the figures. More than half of the financial statement restatements companies did not disclose the one raising the restatement. Only 13% of restatement is raised internally, and 35% of restatement is raised externally. From the information quality perspective, it is poor, since the enough detailed information of the error had not been disclosed.Chapter 4, Practical Investigation of Financial statement restatements (Part II)– Problems, Comparisons and Case Analysis. This chapter analyzed the current problem of the financial statement restatements in our listed companies, focusing on the motives and conditions of the misuse of financial statement restatements, in term, the weakness and inherent limits are identified. Then the current issues of the financial statement restatements in China and US are compared. At the end of the chapter, the financial statement restatements of Prairie XingFa is set as a case, and its characteristics are analyzed; meanwhile, the role of corporate governance and independent audit played in the provision and detection of the financial statement restatements was further investigated.Chapter 5, The Administration of Financial statement restatements: Provision, Detection and Correction. The administration of the government, the corporate governance and the external auditing form the controls on the financial information disclosure. This chapter mainly studies the provision, detection and correction of the financial statement restatements. From the administration of the government perspective, a sound standard for financial statement restatements should be built to administrate the financial statement restatements. The listed companies are responsible for the financial reporting and its qualities. Thus, the corporate governance would have a more positive effect on the provision of financial statement restatements. The independent audit has undeniable effect to improve the financial information quality. Correction is still an indispensible part of the audit; therefore, the independent audit should play an important role in detection of the financial statement restatements.Chapter 6, The Provision of The Financial statement restatements: Evidence from Financial statement restatements and Corporate Governance Variables. This chapter compared the financial statement restatements companies with the non-financial statement restatements companies. The relevancy between the financial statement restatements and corporate governance variables are tested, to find the provisional impact. The results show that the relevancy is not significant, that is no significant difference found between the financial statement restatements companies and the non-financial statement restatements companies. Although it appeared that the proportionate of the independent directors taken in the board of directors has increase, and the audit commissions look much better now, as compared to 2002, the change in appearance does not result in the change in fact. They just only meet the requirements of regulation.Chapter 7, The Detection of The Financial statement restatements: Evidence from Financial statement restatements and Quality of Independent Audit. This chapter chose the data of financial statement restatements companies from 2002 to 2006, tested the relevancy between the financial statement restatements and quality of independent audit. The results show that the audit opinion would be affected to certain extent by the misstatement year, the restatement year, the motivation of earnings misstatement and the extant of the earnings misstatement. This means that the auditors can identify the significant misstatement of the financial statement. However, 70% of the financial statement restatements companies received unqualified opinions. This indicates the quality of independent audit still need improvement.Part III, chapter 8. This is the summary of the paper, including the innovations and main arguments. The limitations and suggestions regarding them were also analyzed, and finally, the future research directions were pointed out.The innovations of this paper include the following:1. this paper analyzed the characteristics of the financial statement restatements companies from the 9 perspectives of the recognition of the restatement figures and reasons, the one who raising the restatement, the audit opinion on the financial statement restatements company, and the category of the financial statement restatements companies, the location, the information quality, and the direction of the restatement, the auditor changes of the financial statement restatements companies. Based on it, the sever problems our financial statement restatements companies facing were stressed. Specifically, they are: no standard for the restatement, the delay of the restatement information, accounting income manipulation as main motivation, the information disclosed is unclear, so is the audit opinion, lack of communications between accountants, etc. These conclusions provided important evidence for the improvement of financial reporting quality, and the standard-setting to guide the financial statement restatements of the listed companies.2. The empirical method was used to find the effects and limitations of the independent audit had on the financial statement restatements. The results show that the qualified opinion would reflect the extent of the misstatement of the financial statement restatements companies. The motivation and the CPA can identify to certain extent of the significant misstatement. However, the detection is not significant, which indicates the quality of independent audit still need improve. The empirical method was used to find the effects and limitations of corporate governance had on the financial statement restatements. The results show that the corporate governance didn't fulfill its duty of provision the financial statement restatements. It was pointed out that, not only the appearance of the corporate governance, but also the actual effects of the corporate governance should be focused. The previous conclusions provide empirical evidence for the administrations to support the regulation settings. 3. The sample in this research includes the financial statement restatements corporation from 2002 to 2006, which contains the financial statement restatements resulted from errors as well as the fraud. This sample is better representative than the sample used in the other research, which only contains the fraud ones. The fraud is the extreme, and the sample is small. The conclusions of their research do not have a better representative nature.
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