The Effects On Audit Fee By IPO Corporations Earnings Management

Earnings Manipulation began to be an important field of the academiac since1980s,20th century.Because of the high degree of separetion of ownership and management in the modern campanies.Agent behavior causes the serious asymmetry of information between company ownership and management authorities.And based on the economic man theoretical assumptions of the managers,the phenomenon of earnings manipulation has been widerspread.The impact of earnings manipulation on the capital market allocation of resources and the interests of investors increasingly significantit causes the study on earnings manipulation in the domestic and foreign academic circles for decades enduring.After China’s Shenzhen Stock Exchange and Shanghai Stock Exchange have been estabilished in early90th.The domestic stock market began to take shape and developted gradually.With the rapid economic development of the market,listed companies began more and more.Securities market provide a good platform for financing profitability and optimize the allocation of resources of listed companies.However,due to China’s capital market development time is shorter,many issues frequently appear in the stock market,such as dislosure of information,financial fraud,malicious manipulation.These issures made seriously affect on the interests of investors and the market remained healthy long-term development.Based on these situations,domestic academia began to study the phenomenon of earnings manipulation in China’s market.and developed rapidly soon.Initial Public Offerings(IPO) as the most critical step of listed companies enter the securities market,earnings manipulation in it get much attention by the academia.Western financial and accounting sector with a large number of empirical studies prove that the listed companies in the IPO porcess to manipulate earnings target.Domestic IPO earnings manipulation literature is less.but few study also analysised all aspects of earnings manipulation in the special capital market of China. Based on special circumstances in China.listed companies in order to IPO and improve the stock price,managers have a strong incentive to manipulate earnings indicators.and as far as possible to convey a message to the outside world:the company has a good operation results.Because of some of the shortcomings and gaps in the Accounting Standards.managers of listed companies have chances to put the motive into actual.IPO companies manipulates the financial reports to make it more attractive to investors, but this is not what the SEC defines IPO. Thus, some "good "companies are also listed on the markets to mislead the investors. It is also harmful for the security market to improve its efficiency. However, the management has the inner information about the financial position, the information asymmetry between SEC and management exits. At this point, the SEC requires the third party which is accounting firms in this case to review or audit the financial reports. Although independency of accounting firms is required by SEC to ensure the reliability of the audit reports, at certain time they might lack independency because they have to charge to achieve some profit given the cost. This audit fee connects listed companies and accounting firms, the connection impairs the dependency of accounting firms. Listed companies have the motivation to pay more to ensure an unqualified report given the earnings management. Besides, the earnings management raises the audit risks, more audit process or long-term audit would be used to lower the audit risk. The accounting firms will charge more to cover the extra costs. This paper uses Jones model to measure earnings management and then examines the correlation between earnings management and audit fee.Because the earnings management differentiates among industries, this paper uses the companies in manufacture industry between2008and2009listed A share. This paper examines the earnings management during IPO period, using modified Jones model. To be more accurate, this paper modifies Jones model by adding operational cash flows. The results show that IPO companies manipulate earnings during the IPO period, and the earnings management in companies two years before the IPO is higher than two years after the IPO. Based on this result, this paper uses IPO audit fee and two years after audit fee as the dependent variables, the accruals as the explanatory variable, asset and inventory as control variables to examine the regression correlation. Because of the specific situation faced by local accounting firms, this paper also groups the sample into top ten accounting firms and non-top ten ones. The results between groups show that top ten group has more significant correlation than the other one.Specifically,the main content of this paper is divided into five parts: Chapter1,Introduction.Briefly introduced the background of this article,research purpose and significance,research ideas and methods.At last,proposed approximate framework.Chapter2.Literature Review.This article based on domestic and foreign academic research on earnings manipulation and audit costs,summarizes the definition of academic characteristics of earnings manipulation and concept definition.And then,summarizes the factors affecting domestic and foreign academic circles on the definition and characteristics of the audit fees.At last interpretate the correlation between audit fees and earnings manipulation.Chapter3.Basic theory of earnings manipulation and audit costs.Based on the actual situation of China’s securities market,this chapter make a comprehensive and detailed explanation and analysis on earnings manipulation of the process of IPO manufacturing companies.And base on China’s special audit market,analyse the situation of audit fees market.At last,this chapter make mechanism analysis of the correlation between the IPO earnings manipulation and audit costs.Chapter4,The correlation between the IPO earnings manipulation and audit costs.This chapter started with the selection of the empirical samples,introduced data processing,model selection,variable definition.Analysed the existence and extent of earnings manipulation of sample companies.Chapter5.Conclusion,shortage and policy recommendations.Summarizes the empirical results according to the empirical analysis of the fourth chapter.And put forward relevant recommendations.This paper might have the creation as follows. First, this paper modifies the Jones model by adding operational cash flows to ensure accuracy of measurement of earnings management in manufacture industry. Second, this paper enriches the research on audit and earnings management in China. Mostly, the research examines the audit fee and earnings management after IPO instead of IPO period. This paper compares the companies two years before IPO and two years after IPO. Thus, the results of this paper provide empirical evidence during IPO period which is not frequently talked recently.