The Relevance Between Corporate Governance And Audit Opinion

When financial crisis burst out in Asia, it has widely been believed that incomplete financial system and abuse of financial activities are internal factors of financial crisis since 1997. Thus corporate governance has been gradually focused on over the world. At the beginning of 2002, Security Supervision and Administration Committee of China, together with National Business Committee, issued"Corporate Governance Standards of Listed Companies", which demands listed companies regulate their structures of organization and marketing conductions. The promulgation of the standards is viewed as an important forward step in the construction of system of Chinese corporate governance.Although corporate governance has been brought into notice for no more than twenty years over the world and merely for several years in China, it has been developed at a surprising speed. This proves that corporate governance is significantly contributive to the development of corporation. At present, there are many studies on the issue of corporate governance, but no complete system has been formed. As far as I am concerned, the point from which to research on corporate governance is considerable important. For many years, scholars have shown great interest in discussions about issues on accounting and internal auditing according to corporate governance. Now that there are relatively rare researches on external auditing in corporate governance field, this dissertation will study the relevance between corporate governance and audit opinion.The concept of corporate governance can be explained from two points. Narrowly, corporate governance is regarded as a serial of system arrangement for regulating responsibilities, rights and interests among shareholders, board of directors, and managers. Comprehensively, corporate management not only includes the above, but also includes the relationships between corporation and other groups, such as employees, clients, suppliers, creditors, social districts and so on. In addition, it includes human resource management, profit distribution, financial rules, decision- management system for strategic development of corporation, culture of corporation, and other systems associated with high-level managers'control.Corporate governance can be referred as entrust -agent structure. In this structure, to take its accountability relationship, trustee needs to record, calculate and report the acting. Meanwhile, to supervise the acting of trustee, entrustment also needs to record, calculate and report the process and result of the acting. The same tool used by both sides is accounting, because accounting can objectively reflect and help supervise the process and result of the acting. Accounting provides the two sides of entrust -agent with accounting information so that both sides could make rational decisions. However, shareholders will not have faith in accounting report unless accounting report is audited by certified public auditors. Therefore it is easily to be seen that corporate governance is one of factors that give rise to corporation's need of external audit.Although audit plays an important role in corporate governance system, we doubt whether corporate governance level would influence the audit opinion. In fact, the purpose of the audit contract is to reduce the agent cost, and protect the benefit of the owners, investors and the beneficial related. Therefore, we believe that when CPA issues audit opinion, he will care about the agent problem: ethics risk and converse choice, both of which are the essential problems that corporate governance try to resolve. According to Audit Standards, after performing the necessary audit procedure, CPA must issues his audit opinion about the legality and fair of financial statement, in order to improve its reliability, and reduce the deal cost due to information asymmetry. In some extent, the purpose of corporate governance, or the problem that is to be resolved in corporate governance is the same as CPA concentrates on.In our nation, accounting information plays an essential role in both macro-economics and micro corporation management. However, the quality of accounting information of listed companies in China is low, which blocks the development of economics. This is caused by the deficiency of corporate governance. In practice, corporate governance is the management and control system of corporate, which will effect the healthy development of listed companies and stock market. On the other hand, the inferior quality of accounting information encumbers the improvement and perfect of corporate governance structure. Finance statement will convey the final result of accounting information, and CPAs have to issue his opinion on the accounting statement. Therefore, we claim that the level of corporate governance will influence the audit opinion.This paper analyses the relevance between corporate governance and audit opinion with both positive and empirical research method. The remainder of the paper is organized as follows; Section 1, as an introduction, covers the describing background, incentive and method of the research. Section2 analyses the theory of corporate governance, audit opinion and the relevance between audit and corporate governance. Section 3 discusses the related research in abroad and home. Section 4 is the empirical result with the data of manufactory industry of A-share listed companies in China, we examine the influence of corporate governance on audit opinion.In the aspect of level of corporate governance, its theory research is just beginning, but the practice develops much faster. Some institutions and organizations, such as Standard & Poor,have already build up the corporate governance estimate system. At home, Liancheng international research and consult group and Nankai corporate governance research center etc. , all have developed its own system, and the result goes public. These results can reflect the general level of corporate governance, due to its integration, independence and professional authorization. This paper choose corporate governance rank promoted by Liancheng international research and consult group as research data, to examine the influence of corporate governance on audit opinion.According to the"Audit Standards For China Certified Public Accountant", there are four types of audit opinions: unqualified opinions (including standard unqualified opinions and unqualified opinions with explaining paragraphs) , reservation of opinions, negative opinions and refusal to express opinions. I regard standard unqualified opinions as clean opinions, others as modified opinions.I collect financial information of the manufacturing industry of A-share listed in Shanghai and Shenzhen stock exchanges in 2004. Then I use two logistic models to test if there is influence of corporate governance on audit opinions. As expected, I find that companies which are on the high level of corporate governance are more likely to get clean opinions. There is still some shortcoming of this research. For example, I only collect the data of manufacturing industry in 2004. It is not very good to concentrate on a period of just one year in an empirical study, because it may bring some problems in statistic test. By this research, I analyze the relevance between corporate governance and audit opinions. It supplies a gap of former research concerning corporate governance and audit. For further study, we can connect it with governing–oriented audit for analysis.