The Governance Of Financial Report Irregularity--The Perspective Of The Encouragement And Control Of The Listed Companies

In recent years, many listed companies have been found out for releasing irregularity financial reports. This situation hinders the stable and sustained development of the stock market. The irregularity phenomena have the characters of huge sum, fabricate transactions and the senior management taking part in irregularity. This paper divides irregularity into two categories: the irregularity has the direct effect to financial reports and the irregularity has the indirect effect to financial reports. It focuses on the former one. It has three parts: the first part analyses the theory foundation to the governance of financial report irregularity. The second part analyses Chinese present situation of encouragement and control. The third part brings up some advices. The following is the viewpoints of this paper.The first part discusses financial report irregularity by principal-agent relationship and advances that decreasing externality is a reasonable starting-point to the governance of financial report irregularity. Encouragement and control are all based on externality and the methods to lessen externality. The further analysis to encouragement and control draws these conclusions: To deal with financial report irregularity we can take the method of combining encouragement and control and pay more attention to control.The second part makes an on-the-spot investigation to Chinese present situation of encouragement and control. It exposes these facts: (1) The senior management have the low surface income and high hidden income. No encouragement system has been established. (2)Encouragement right is arranged unreasonably. (3) Internal control is weak, aufsichtsrat hasn't perform effective supervision. (4) No effective merger market and manager market. External supervision mainly depends on the government; Lack of civil liability CPA isn't independent enough and the quality of their performance is low.The third part gives some advices according to Chinese facts. (1) It is significant to set up a salary encouragement institution combining wages,annual bonus and stock option. Because future stock has the advantage of strong restrictions, so it is more suitable to present China than stock option. (2) Perfect encouragement right, set up remuneration committee under independent director institution. (3) Change equity structure to provide a background for the perfection of encouragement right and corporate structure. (4) Strengthen independent director institution, pay attention to these aspects; Prevent the major shareholder from controlling person selection. To maintain the independence of the independent director,we should set up the rules to investigate and affix the responsibility and establish the regulation of indemnity. Establish audit committee, internal auditor's board should be responsible for audit committee. Divide duties between independent director and aufsichtsrat. Improve the number of independent director and the management of independent director. (5) Perfect civil liability to protect inventors. (6) Develop forensic accounting to expose irregularity. (7) CPA should keep independent position, optimize quality control and revise relevant laws and regulations.