The Empirical Research Of The Relationship Between The Characteristics Of Audit Committee And Financial Restatement

In recent years, the proportion of listed companies which has restated has increased steadily,and the phenomenon tends to spread. Financial restatement means that a company correct or release supplementary announcement of its previous annual reports after it has been published. In a sense, the financial restatement shows that the previous accounting information is not true, therefore, it may ruin the Company’s reputation, and bring huge losses to the company and the investors. On the one hand, financial restatement will make stock prices fall down, and take loss to shareholders’ benefit. On the other hand, financial restatement will cause the capital cost of company get a rise which damage the value of the listed company. Furthermore, the companies of the same industry will be subject to this economic loss.More and more researchers and regulators begin to pay attention to the seriousness of the financial restatement in order to find a reasonable way to prevent and reduce the negative impact of financial restatements. The basic reason of financial restatement is separation of management and ownership in the modern corporations. Because the target of managers is different from the shareholders, so the manager may infringe on the benefit of shareholders when the income is bigger than the cost. This behavior we call it moral hazard. Therefore, some institution just like auditing firms begins to appear to reduce the possibility of financial restatement. However, because it is an intermediary for benefit, it may be driven by interests inevitably which is contrary to its professional ethics and fairness. Therefore, the audit committee system emerged, and played an important role in the supervision of the company’s financial reporting process and the internal control process, as well as the hiring and communication of the external auditing institutions. The effect of its implementation in practical work has been affirmed by the accounting profession n the stock exchange、the securities regulatory body in many countries. This paper is researching on the relationship between the characteristics of China’s listed company’s audit committee and financial restatement. In the course of the study, the author finds some problems in the development process of the audit committee system, then, the paper gives some recommendations which would make some contributions to the promotion of the development of audit committee system in China, as well as to reduce financial restatement.The paper first reviewed the literature at home and abroad in three aspects: the purpose and effectiveness of the Audit Committee、the factors affecting financial restatement、the relationship between the characteristics of audit committee and financial restatement. According to the existing research, researches overseas is much more than domestic researches and the normative research takes a larger proportion, the empirical research is not enough to come to an agreement.Based on the characteristics of Audit Committee, the paper analyses the relationship between the characteristics of Audit Committee and Financial Restatement, and put forward the hypothesizes as follows:(1) When the Audit Committee’s independence is high, the probability of financial restatement will be low, that is to say the relationship between the Audit Committee’s independence and the probability of financial restatement is negative.(2) The richer the experience of Audit Committee members, the lower the probability of financial restatement will be.(3)The allowance Audit Committee members get from the listed company is negative refer to the probability of financial restatement.(4)If the Audit Committee member’s home is consistent with the address of the listed company, financial restatement is less likely to happen.Based on the data of A-shares in2008-2010selected from CSMAR database, and the information of financial restatement is selected from WIND database. The paper adopt Logistic model to test weather the data is consistent to hypothesis. The empirical research includes descriptive counted、relevant analysis、logistic regression and robustness analysis.From the analysis, some useful conclusions can be summarized as follows:(1)The higher the Audit Committee’s independence is, the lower the probability of financial restatement will be.(2)The richer the experience of audit committee members, the lower the probability of financial restatement will be.(3) The more allowance audit committee members get, the lower the probability of financial restatement will be.(4) If the Audit Committee member’s home is consistent with the company address or not, the probability of financial restatement will be small.Finally, the paper put forward some recommendations according to the studies in the previous. Firstly, Improve the law to enforce the audit committee established in listed companies, in order to ensure the implementation of audit committee system. Secondly, Improve the independence of the Audit Committee from the quantity、selection mechanism and evaluation mechanism to guarantee the province of independent directors. Thirdly, elevate the salary of the independent directors in a certain extent to encourage they carry out their responsibility harder. Last, establish the evaluation and obligation mechanism of Audit Committee scientific to ensure the positive effect of Audit Committee.