A Study On Auditor Reputation Punishment Mechanism

In recent years, a series of outbreaks of major domestic and international financial reporting fraud and the corresponding audit failure have greatly affected public trust of the whole auditing profession. In such circumstances, to achieve the goal of making the audit industry into a professional one which the public and investors can trust, it is urgent to greatly improve the quality of independent audit. Audit quality means CPA’s ability to find and timely eliminate the existence of errors in financial reports, which depends on CPA’s independence and professional competence. However, because of the invisibilidad of the two factors, CPA’s professional reputation directly becomes the convenient standards of auditing quality for the public.Researching whether there exists effective auditing reputation forming mechanism in the stock market is conducive to building up China’s accounting firms’ reputation and maintaining their high public credibility. Therefore, the emphasis on the establishment and operation of independent auditing reputation mechanism becomes a very urgent and important issue of the present auditing industry.This paper firstly introduces the background and researching significance of the independent auditing reputation in our country, and makes a brief description of the research ideas in this paper, usin the chart form. The introduction section also describes in detail the research methods of this paper, and analyses the writing features of this paper, at the same time,the writing problems and deficiencies are illustrated too.The first chapter. This part mainly summarizes and analyses the researches about independent auditing reputation mechanism which have been made by domestic and foreign scholars, and with the introduction part, it interprets the development situation of the auditing profession in China. On the basis of previous research on independent audit reputation, it proposes the research direction for independent audit reputation in China.Having read a lot of material and papers from home and abroad about audit field, I found: foreign researchers mainly use empirical methods to study the audit reputation, and the main research areas include the following: signal transfer function, the effectiveness of the audit reputation, audit reputation creation, demand comparison of accounting firms’ reputation. In our country, there are few scholars who specialize in the research on independent audit reputation mechanism, while most of them are found in other research themes and normative research method is the main research method for the scholars in our country. In recent years, some scholars research on China’s independent audit reputation from the perspective of reputation punishment mechanism, but there is no uniform study result. Whether it is useful for the independent audit reputation is still not identified by the academia.Based on previous studies, this paper will test the effectiveness of the independent audit reputation in our country, using punishment mechanism as a breakthrough and on the basis of the response which the capital market makes to the the accounting firms.Chapter two. About the independent audit reputation mechanism, this part mainly makes a theoretical analysis, with the purpose of providing strong theoretical support for the study theme of the independent audit reputation mechanism in our country. Firstly, I outlines the concept of reputation, the concept and composition of the independent audit reputation mechanism. The independent audit reputation mechanism is consisted of four major components:screening system, testing system, punishment system and information processing system.Secondly, this section briefly describes three required conditions for the establishment of the independent audit reputation mechanism, and discusses the role of it. In this part, it illustrates the role of the independent audit reputation mechanism and the significance of the establishment of it. The independent audit reputation mechanism has the four major functions:(1) signal transfer function (2) quality assurance function (3) saving social cost function (4) standardization and development function.Thirdly, the third part of this chapter mainly makes a theoretical description of the punishment mechanism which is one subsystem of the independent audit reputation mechanism, and it introduces meaning and function of the punishment mechanism, and at the same time, it analyses the working condition of China’s independent audit reputation punishment mechanism.In summary, the independent audit reputation punishment mechanism has the following functions:on the one hand, punish the accounting firms because of their dishonesty; on the other hand, deter dishonesty of the independent accounting firms.Lastly, part four of this chapter describes the concept of the failure of the independent audit reputation mechanism, and analyses the hazards which may be caused to the market when the independent audit reputation mechanism fails. The failure of the independent audit reputation mechanism will greatly harm the investors, accounting firms and the whole capital market, and a "bad money drives away good money" phenomenon may appear.The third chapter is mainly about empirical test. The paper selects ten accounting firms and other listed accounting firms as the research object which are punished in 2005 by the Audit Commission Notice No.4, and takes the penalty notice as the study events, and at the same time, it tests the effectiveness of our independent audit reputation by examining the reaction which the market investors made to the relevant listed company’s share price during [-120.3] event window period. Based on the analysis and research on the second part, I give the conclusion:our country’s independent audit reputation mechanism exists, but is not effective. In the end, I analyse the causes of the failure of the independent audit reputation mechanism.Chapter four. Based on the previous chapters’ researches and conclusions, this chapter is focused on how to establish and improver our country’s independent audit reputation mechanism and to provide some suggestions for the full play of the incentive and punitive functions of the independent audit reputation mechanism.