An Empirical Research Of Relationship Between Audit Committee Establishment And Earnings Quality

Audit Committee as an important institutional arrangement in corporate Governance is playing an active role to improve the corporate governance structure and enhance the quality of the company's financial information. With the establishment and development of audit committee institution in China, audit committee of the public companies whether or not to affect the quality of financial reporting has always been a concern of the Chinese scholars.Based on Basu (1997)'s model of earnings conservatism, and the establishment of the Audit Committee of the horizontal and vertical dimensions to test the correlation with earnings quality, results for the first dimension test show that there is a significant negative correlation between the voluntary establishment of Audit Committee in Chinese public companies and earnings quality. This shows that in Chinese public companies, the voluntary establishment of the audit committee can significantly improve the earnings quality of the companies. When we sample companies into loss and profit companies and regress the two groups respectively, we find for the group of profit companies, compared to not establish an audit committee of companies, companies establishing an audit committee show the earnings conservatism is more robust, and the same for the group of loss companies, which means establishment of the audit committee does play its due role no matter the companies have the "big bath" behavior; the test results of the second dimension show that establishing an audit committee for Chinese public in the second year indicates a strong earnings conservatism, which indicates post-establishing an audit committee for public companies significantly improves the earnings quality, and the role exists a hysteresis. In this paper, and then we reuse Ball and Shivakumar (2005) accrual-based model for the test of the two dimensions, and the conclusion do not demonstrate significant differences.Based on the above conclusions, this paper holds the relevant departments need to further regulate the audit committee establishment, as well as establishing an audit committee is voluntary to a mandatory gradually, so as to achieve the role of enhancing the level of corporate governance of listed companies.