A Research On Semi-annual Auditing Of Listed Companies

While auditing of semi-annual reports is not mandatory in China except for a subset of firms in circumstances specified by the state regulator, a number of Chinese firms voluntarily purchase audits for their semi-annual reports. The Chinese stock market provides a unique institutional setting to investigate empirically why listed firms voluntarily have their financial reports audited and whether auditing detects and prevents earnings management.This dissertation firstly classes listed companies into three categories: refinancing companies, special treatment companies, and other listed companies. On the basis of classification, this dissertation separately examines the determinants of voluntary auditing of semiannual reports and the role of auditing on earnings management. This dissertation finds:(1) The decision of refinancing companies for semi-annual auditing is positively associated with the share ratio that the largest shareholder holds and negatively associated with size. The motivation for refinancing companies to hire an outside auditor can be explained with agency theory and signal theory. The extent of earnings management in the financial report voluntarily audited is lower than that in the financial report un-audited and mandatorily audited.(2)Unlike the refinancing companies, the special treatment companies' decision for semi-annual auditing is negatively associated with the share ratio that the largest shareholder holds and size, but positively associated with growth, which means that the major reason for special treatment companies to hire an outside auditor is to signal to the users of financial reporting. There is no significant difference between voluntarily audited report and un-audited report, nor between mandatorily audited report and un-audited report, which leads to the conclusion that auditing drops its effect for preventing earnings management in special treatment companies.(3) The decision of other listed companies for semi-annual auditing is positively associated with ROE, again supporting signaling hypothesis for auditing demand. Besides this, there is an U shaped relation between voluntary audit and the share ratio that the largest shareholder holds. Because of statistical constrain, the role of audit on earnings management in other listed companies cannot be examined precisely.