Study Of New Audit Entrustment Pattern

A partial solution to corporate structure's separation of ownershipfrom control requires managers to report an accounting of thecorporation's condition and performance to investors, using a generallyrecognized accounting system and a third-party auditor vouching for thereport's veracity. Auditors face inherent conflicts and capture risks thatimpair this mechanisms' efficacy. For the wave of audit failures of thelate 1990s and early 2000s, numerous suggestions to strengthen thismonitoring mechanism appeared. In America, Adopted repairs include new auditor independence andoversight rules, as well as a new audit of internal control over financialreporting. Other pending proposals contemplate imposing various formsof modified strict liability on auditors, and so on. These repairs andproposals mitigate conflict and capture risks, but only indirectly. To nipthese problems closer to the bud, this paper considers insurance-basedaudit entrustment pattern, which is developed from the concept offinancial statement insurance (FSI), as an optional alternative totraditional audit entrustment patterns. Insurance-based audit entrustment pattern removes auditors fromcapture and conflict risks inherent in their relationship with managementby putting them in the employ of independent insurers whose vestedinterests in quality financial reporting are more nearly aligned withinvestor interests. By this method, auditors' independence is deeplyimproved. However, as any other proposal, it presents challenges. Thispaper expands the model first sketched by Dr. Ronen, extending andinterpreting it to examine its efficacy, attempting to eliminate perverseincentives which cause audit professional misconduct by the roots. Ingeneral, although the theory of insurance-based audit entrustment patternis not perfect, it promises considerable advantages compared totraditional audit entrustment patterns. The main structure of this paper is as follows: In the introduction, the author analyses the causes which inducedmany accounting scandals' breaking out. Then the paper presents recentproposals such as increasing audit independences, new control auditing,and so on. By the discussion of these proposals, the author puts forwardthat the only way to increase the audit independence at root is changingthe traditional independent audit entrustment pattern. PartⅠfirst introduces the two kinds of audit entrustmentpattern——direct and indirect audit entrustment patterns. Through theanalysis of current condition at which stock rights are highly separated,the author concludes that for the public companies, only indirect auditentrustment pattern can be used. But under this kind of pattern, for themistaken choice of audit agent chargers, auditors' independence is largelydamaged. So we should choose correct audit agent charger anew. PartⅡ presents the proposals for the audit entrustment pattern athome and abroad. After the review of two typical patterns, the authorpushes out the concept of financial statement insurance, which is a marketmechanism that realigns the incentives of the players of this economicallyvital financial game: let honesty be pursued in the self-interest of CEOs,Chief Financial Officers (CFOs), boards of directors, and the auditors;and eliminate the perverse incentives that are pervasive under the currentsocial arrangement. PartⅢ is the research on the basic theory of financial statementinsurance system involving FSI procedure and the decision-makingprocess of each of its participants: the insurer, the auditor, the capitalmarket, and the insured. Then the author establishes the concept ofinsurance-based audit entrustment pattern on the base of financialstatement insurance theory. After summarizing its characters, the authorconcludes it is superior to the traditional audit entrustment patterns. PartⅣ involves more elaborate examination of insurance-based auditentrustment pattern, chiefly from insurance principles and practiceperspectives, relative legal norm, supervision, and so on. On the basis ofwhat is discussed above, the...