Corporate Governance And Audit Quality: Empirical Evidence

This paper discusses corporate governance and the origin of audit by the contract economics and the relation between corporate governance and audit in the view of accounting information and auditor independence. For improving audit quality, it focuses on the effect of the whole corporate governance system on audit quality, the relation between the corporate governance subsystem and audit quality, the correlation between the board characteristics and audit quality by positive analysis.Firstly, according to system theory and bonding hypothesis, this paper uses cross-listed companies as a proxy for the quality of corporate governance and accounting accruals as a proxy for audit quality. It finds that higher quality of corporate governance results in less accounting accruals and higher audit quality. Secondly, the corporate governance system is divided by ownership, board, board of supervisors and exterior governance mechanism used by the principal component analysis. It uses accounting accruals and audit fee as proxies for audit quality. The research results as followed: (1) The board of supervisors and the exterior governance mechanism don't run well that they should be. (2) The additional effect of the ownership on the board decreases audit fees. (3) The board can improve audit quality. Thirdly, after signing the agreement of audit services, audit quality lies on the role of the board. Meanwhile, both the government and the investors pay more attention on the length association between an auditor and their clients. In order to test the effect of the board characteristics on audit quality, our sample chooses listed companies audited by the same audit firm in the event year. The main results as followed: (1) There is significantly positive association between the rate of board members who are rewarded and audit quality. (2) There is also significantly positive relationship between audit committee and audit quality. (3) The importance of the client erodes auditor independence, which in turn impairs auditor quality. Finally, according to mentioned above, there are some measures to improve audit quality that are the establishment of single board, setting up more competitive audit market, the establishment of legal duty of manager and auditor.This paper uses contract economics as theory basis to discuss the association between corporate governance and auditing. For the first time, it adopts system analysis. This paper focuses on how the whole corporate governance system, the corporate governance subsystem and the board characteristics affect audit quality step by step. The research results enrich the empirical literatures.