The Study On Environment Characteristics Of Financial Fraud In US-listed Chinese Companies

In June2011, the Interactive Brokers which is the largest non-bank securities brokerage in America submitted a "black list" to the market, and132US-listed Chinese companies have been questioned because of the likely presence of financial fraud. Some US-listed Chinese Companies are delisted or suspended. Moreover, the stocks of US-listed Chinese companies remain in the doldrums and many stock prices are below$1for a long time. The "black list" directly led to huge losses for Chinese companies listed in the United States. The financial fraud will seriously affect the normal development of the market economy. Therefore, it is significant to study the characteristics and recognition of financial fraud.The research objects of this article are the internal and external environment characteristics of financial fraud of Chinese companies listed in the U.S. Based on previous researches on the characteristics of financial fraud and recognition results, the article defines two new concepts about financial fraud and financial fraud environment characteristics, and then analyzes financial fraud and the effects of internal and external environmental factors on the presence of financial fraud using the agency theory, double principal-agent theory, game theory, incomplete contract theory, state-contingent ownership theory and organization behavior theory in order to pave the theoretical foundation for the empirical study. According to the results of theoretical analysis, the author selected84US-lised ChineseCompanies on the "black list" as fraud samples and84US-listed Chinese companies not on the "black list" as non-fraud companies as comparable companies in the light of the matching principle. The descriptive statistical results showed that there is a significant difference of the11environmental indicators, which indicate that the presence of financial fraud of the US-listed Chinese Companies in the internal environment is characterized by the following factors:bigger board of directors; the same person holding position of both Chairman and CEO; bad operating condition because of high percentage of liability to assets and negative net profit; and short period of listing time. The characteristic of external environment are as follows:location of the company in areas where the market economy is relatively developed; tendency to select local CPA firms and the domestic big four CPA firms; the frequent replacement of CPA firm; and the number of years of continuous auditing not more than3years.In order to study the relationship between financial fraud and financial fraud environmental characteristics, the Pearson correlational analyses were conducted between the independent variable and dependent variable. The data showed that four independent variables and the occurrence of financial fraud has a negative linear correlation, including the profitability of Chinese companies listed in the United States, years listed in the stock exchange, the degree of development of the market economy in the CPA firms location and the number of years of continuous auditing. While, two independent variables, such as the degree of development of the market economy in the company location and the accounting firm in the same place, have a negative linear correlation with occurance of financial fraud. Finally, the stepwise regression was carried out on the basis of correlation analysis. The final logistic model includes four variables:asset-liability ratio (X7), years listed in the stock exchange(X9), the location of accouting firms (X12) and the number of years of continuous auditing (X14). The level of significance P=0.0000illustrates that the equation can be used to recognize financial fraud in the United States listed Chinese Company.Contribution of this paper includes four aspects. First of all, it is helpful for auditors to identify fraud. Secondly, it provides reference to supervision and management departments to develop relevant systems. Thirdly, it is useful for the investors to identify fraud. Finally, it provides a theoretical proposal to perfect company’s internal governance structure.