Study On The Relationship Between Audit Opinion And Debt Default Prediction

With the completion of the commercial transformation of state-owned banks, in particular the establishment of the special policy banks, policy loans dwindling, banks’ lending behavior increasingly market-oriented, the debt breach occurred more frequent. Forced by its competition within the industry, banks have to relax its’loan conditions, which leads to the common situation that enterprise borrows more than its own capacity. Whatever, the main source of profit of China’s commercial banks is the interest rate differential between deposit and lending, than, the survival and development of the commercial banks is closely related to the quality of credit assets. The management capabilities of credit risks become indicators which can be used to measure the core competitiveness of banks. Credit risks are composed by the risk of default, exposure risk, duration risk and so on, moreover, the research of debt breach became a research Popular.Audit report is the final product of certified public accountant performing audit procedures which independent of information users and principals. Audit report is also an important way to maintain accounting statements meet the fair value and the required of fair presentation. What’s more, audit report can solve the information asymmetry between the investors and listed companies. Creditor, another user of audit report, often regards it as criteria to assess of the borrower’s ability to repay and the loan security. In fact, does the audit report contribute to the creditor resolving the problem of information asymmetry between himself and his customers? The main purpose of this study is to explore usefulness of the predicting function of audit report from both theoretical and empirical integrated. First, we analyze the causes of the debt default from a theoretical point of view, and then analyze the role of the audit opinion in the default prediction process. Finally, we examine specific issues from an empirical perspective.Specifically, we need to solve the following problems:First, the audit report on the debt default prediction function can be explained from the theory of signal transduction, but it remains to be tested from an empirical perspective. Mostly, banks require companies that need loans to provide audit reports for the last three years, and then from the perspective of default prediction, is it necessary? While there is always a great difference in the internal and external environment of listed companies, will these differences impact audit opinion’s prediction function or not? You can see from the previous literature research that bank lending decisions closely related to the nature of corporate ownership, the area’s degree of market-oriented where the corporate registered and the corporate governance structure. That means banks considered these internal and external factors in the loan approval process. Thus, we speculate that there is a certain relationship between these factors and the occurrence of debt defaults. That being the case, if we consider them as influencing factors of audit opinion’s prediction function, does it be the impaction of prediction accuracy? Since the bank’s lending decisions are often associated with the audit opinion, we conclude that the bank consider the audit opinion in the loan decision-making process. Moreover, does the consideration based on the prediction function of audit opinion?This paper is divided into five parts in addition to the introduction, the main contents are as follows:Chapter one, firstly, defining the concept of breach of contract. And then, we explored the credit default behavior based on the theories of information asymmetry and soft budget constraints. Thirdly, we introduced and evaluated the debt default prediction model. Furthermore, the signaling role of the audit opinion is analyzed; the literature of audit opinion having an impaction on bank lending decisions by the signaling role is introduced. Finally, we reviewed and summarized the related literature of audit opinions debt default predicting function.The second chapter, analyze the factors influenced the process of using audit opinion to forecast debt default. The impact of internal and external environment factors which influence the process have been specifically analyzed, including equity nature of actual control, the degree of market-oriented, the position setting of directors and manager and the acquisition of new financing enterprise, than, we put forward our hypotheses. Secondly, we examine the role of audit opinion in process of approving bank loan.The third chapter, we discussed and determined the selection of default sample, collected and collated research data, and thus defined variables. We extracted three common factors from financial indicators as control variables to control the goodness of fit of the model by factor analysis, other influencing factors also have been taking into account such as the size of the enterprise, operating experience, industry differences, total remuneration of executives top three, the scale of Board of Supervisors and so on.The fourth chapter, we conducted correlation analysis, descriptive statistical analysis and logistic regression analysis of the study sample, and explained the regression results with related information in reason, then, the robustness test have taken to verify the results of reliability. The fifth chapter, conclusions have been draw according to the above theoretical analysis and empirical results. Then, the inadequacies of this study have been weighed in view of existing conditions and resource constraints. Finally, we explored the depth direction of future research. The main conclusion of this paper is that audit opinions have the function of debt default prediction, which can predict corporate defaults happening1-2years in advance. However, the forecast accuracy will be different due to the various internal and external environment:the predictive accuracy of the non-state-owned enterprises is higher than that of state-owned enterprises; corporate in the fast market process regional is higher than the slower; Chairman of the Board and general manager of two separate enterprises is higher than the two rank-one enterprise; acquisition of the new financing will reduce audit opinion prediction accuracy; audit opinion have been considered to predict a debt default during the decision-making process of the bank loans.The main contribution of this study is that(1) the existing debt default prediction generally focused on the financial index system research, studies about non-financial indicators system mostly focused on the corporate governance, little specialized investigating the differences of forecast accuracy of audit opinion in different internal external environment.(2) previous studies in terms of both the forecast of a debt default and bank lending decisions are each into the system, there is no relationship between them. However, our study connected the two systems. Firstly, we studied the impaction of audit opinion on the debt default forecast, and then, based on the same model, the same sample, by replacing the explanatory variables to study the impact of the audit opinion on lending decisions, and thus concluded that due to the function of the debt default, bank lending decisions have considered the nature of the audit opinion.(3) Previous research hardly thought about the industry factors, basically ignore it. By studying of preliminary statistics of the sub-sector samples, we controlled three industries:the real estate industry, machinery manufacturing, chemical industry which has more debt default companies, and thus draw more reliable conclusions.