Placement Policy, Earnings Management Studies, And Auditor Independence

Earning management of Chinese listed companies has been motivated by the rigidity of regulation policies issued by CRSC, such as share rights policy, special treatment or Particular Transfer, which, in turn, affect the behavior of CPAs to audit and testify the financial report. If we were studying the issues on the auditing and its independence in China regardless of the background above, the conclusions we have draw would mislead our research. Considering one important term in modern auditing theory and practice (Risk-based Auditing), auditing materiality, we could find an relationship among company operating risk, auditing materiality and audit opinion, which satisfies, the higher operating risk, the higher auditing materiality and then the lower probability of receiving qualified opinions. Following this idea, this paper has encompassed the auditing materiality into the research framework to study the relationship between the auditing independence and earning management.The first chapter is the introduction. The second is the review of related articles. The third begins with the change of the computing method of ROE in newly issued share rights policy. Then I construct new financial ratios in order to observe the earning management. Using the new ratios, I find that companies issuing new shares do manage their earnings, but their magnitude is lower. The fourth one is mainly theoretical analysis, just preparing for next chapter. Sampling listed companies in 2001-2005, I have tried three methods, such as total accruals, cross-sectional Jones model with long-term investment, and adjusted K-S model with long-term investment, to estimate the auditing materiality, i.e. the discretional accrual. Comparing companies received unqualified opinions with the ones qualified opinions, I find that while companies do manage their earnings, the discretional accruals does not exceed the auditing materiality set by auditors. So the conclusion I have draw doesn't support the view that auditors lost their independence when issuing the opinions for the share-right companies. The last chapter is the conclusion and the limits of my paper.