Study On Financial Reporting Quality Affected By Subordinate Modes Of Internal Audit In IPO Companies

With the coming of the20thcentury, there are a series of screaming globalfinancial scandals all over the world attracting our attentions. So defects inmanagement structure of public companies are dug out by people. Internal audit, asone of the most important headstones in management structure, are drawing people’sattention, and the position of internal audit is becoming the focus of all problems. Thesubordinate modes of internal audit mean the hierarchy establishments of the internalaudit department in companies. The higher level in hierarchy establishments, the moreindependent subordinate mode of internal audit is, the more authoritative functions,and the wider ranges and firmer dimensions of supervisions.Firstly, based on the theories of principal-agent, transaction cost economics andmanagement process, this paper analyses the relation between internal audit andcorporate governance. Secondly, this paper summarizes why IPO companies set upinternal audit departments and draws a conclusion, nowadays; internal audit mainly isattached to audit committee, which is controlled by the board of directors. We canconclude from the following discussions that this way is independent enough formanagement, which means public companies in our country has started to realize theinternal governance mechanism and ensure independent statuses by designing areasonable organization structure system, aiming at performing its supervision duty.Thirdly, this paper selects220IPO companies as samples from2007-2009, using trueearning management index and information disclosure ranks to measure financialreport quality and study their relationships. The research results indicate that thesubordinate modes of internal audit modes in IPO companies have a positive relationwith financial report quality. The internal audit has a higher level; there is a betterfinancial quality and a more transparent information disclosure. At the same time, thispaper does a robustness check, the results further supports the conclusion. In the end,this paper puts forward some useful suggestions in improving internal auditenvironments, ensuring internal audit setting modes, clearing-out internal auditposition, enhancing internal auditor executive ability and so on.