Executive Incentives、Earnings Management And External Audit

Executive incentive is not only a mechanism to solve the agency conflicts and promote the enterprises to develop, but also has been a hot topic on practical and theoretical field in recent years. Because of inherent defect of incomplete contracts there are not only incentive effects, but also agency conflicts increasing in the implementation of executive incentive contracts. Berle and Means describe the modern enterprise which is marked of highly separation of ownership and management. In the condition, because of Information asymmetry and uncertain future managers of the company can control the operation of it. Managers maybe deprive the shareholders’ interests by different ways. In theory, the implementation of executive incentives can alleviate the conflict of interests of owners and managers. In fact, some researchers certificate this theory:other researchers prove that this theory is not useful. Because of the contract integrity and agency problems, senior managers may take occupation of shareholders interests in order to obtain high incentive. So based on the supervision needs of shareholders and warranty needs of managers, whether they need high quality audit. Some experts believe that executive incentives can solve the agency conflicts, but it also a part of agency conflicts. This kind of incentive may lead to earnings management. As an external monitoring and security mechanism, whether audit can identify the earnings management.This thesis studies about the connection of executive incentive, earnings management and audit. It is important to improving executive incentive mechanisms of listed companies in China, to enhancing audit role in the security market of China. This thesis is arranged as follow:Chapter1:Introduction. This chapter is planning. It outlines the objectives, the research background, the methodology, and the framework of this thesis. Chapter2:Literature review. This chapter concludes the relevant literature domestic and abroad about executive incentive, earnings management and audit. Then do some comments on the literature. This chapter finds the opportunities of research on the literature review.Chapter3:Theoretical analysis and system background. Firstly, This chapter analysis the connection between executive incentives and external audit using agency conflicts and contract integrity theory. Secondly, this chapter will discuss the connection of executive incentives and earnings management by alienation of the contract theory. At last, this chapter study the connection of earnings management and external audit with agency theory and insurance theory. This theoretical analysis supports empirical research of this thesis, so it is the basis of the thesis.Chapter4:Executive incentives and external audit. This chapter is empirical research of executive incentives and external audit. In this chapter "TOP TEN" accounting firms are used to measure the quality of the external audit, and other factors are controlled.Chapter5:Executive incentives and earnings management. This chapter is empirical research of executive incentives and earnings management. In this chapter, the earnings management is measured by Jones model.Chapter6:Earnings management and external audit. This chapter is empirical research of earnings management and external audit. In this chapter, the earnings management is also measured by Jones model. External audit is distinguished two kinds:one is qualified report the other is unqualified report.Chapter7:Conclusion. In this chapter main findings are summarized again. Expected direction for further study in this topic.Main findings are as follows in the thesis:First, executive incentives is positively associated with external audit. This result means that executive incentives increase agency conflicts, So based on the supervision needs of shareholders and warranty needs of managers, high executive incentives needs high quality external audit. Second, executive incentives are positively associated with earnings management. This result suggests that executive incentives is not perfect, it may increase agency conflicts such as earnings management.Third, earnings management is not positively associated with external audit. This result means that public accounting firm can not give proper opinion to earnings management. This face maybe has two reasons. Fist, the Jones model has defect, it can not measure earnings management precisely. Second, the intense competition between public accounting firm.The contributions of this thesis include:First, the topic that connection between executive incentives and external audit has not been discussed by many former researchers. There is a few of empirical researches about this topic. So this thesis can enrich the literature of empirical research in this filed.Second, considering two factors of executive incentive. One is short-term incentives such as annual salary, the other is long-term incentives such as stock.