Research On The Effectiveness Of Audit Committee

Whether the market makes a benign response is the key of the system usefulness. In terms of listed companies, investors and auditors, etc. all belongs to "The Market". The Audit Committee system is an important part of the corporate governance system. As internal outsider, the audit committee is an integral part of ensuring effective operation, to improve the quality of audit and corporate information disclosure. It plays a role of the catalyst to prevent corporate fraud, and protect shareholders’interests, and to ensure the market orderly operation.After the fraud case of Michelson Robinson Medicine Company, The NYSE and the SEC immediately recommended the Board to set up a special committee in the name of the shareholder to choose (or nominate) the CPA and consult external audit matters to enhance the independence of the CPA, and this can be said that the audit committee was pointed out at first. After more than half a century of development, The Audit Committee system increasingly matures. In china, the audit committee system is officially born soon after the launch of the independent director system. Securities Regulatory Commission of China and the former State Economic and Trade Commission formally promulgated the "Corporate Governance Guidelines" on January7,2002, which is the blueprint for the development of the audit committee of listed companies. Thus, the Audit Committee System comes into the standardization. In this paper, listed companies in China can establish the special committees according to the resolutions of the shareholders’meeting, such as audit committee, strategy committee, nomination committee and assessment committee voluntarily. And the audit committee should have the functions:Ensure the quality of financial information; communication and coordination; supervision and protection.Up to now, the audit committee system had been introduced into our country more than ten years. From the introduction to promote step by step, it gets a positive response of Chinese enterprises, especially listed companies. The majority of companies have established audit committee, because of continuously improvement of the legal system, and the quality of listed companies. But, it needs to test whether the audit committee is useful, that is whether it’s good for corporate governance. There are two ways about the research of the system, one is exploratory research before the implementation of the system, and the other is evaluative research after the implementation of the system. The latter is the important area of academic research.The reform of IPO system provides favorable institutional background in this paper. From April2001, IPO quota system of administrative oriented era is over. In December2004, the inquiry system officially landed in China, and officially implemented since January1,2005. The companies are priced by the market, and it enables companies to improve corporate governance and pass favorable information to investors. This change provides a way for the test of the effectiveness of the Audit Committee Governance in the time of IPO. Now there are many research results about the effectiveness of the audit committee, but not in the field of IPO. In this paper, the author will make evaluation of this system in this blank field.In this paper, I reviews the origin and evolution of the audit committee firstly, the role of the audit committee in corporate governance from the perspective of the function as well as. As this research clues, I test of the validity of the audit committee in the governance of IPO period more comprehensive with Competitive Resources Theory, Signaling Theory and Audit Risk Model,and the test from three angles: The influence of the audit committee on IPO pricing, auditor choice and audit fees. Then, according to the research purpose, follow the principle of the appropriate sample selection, select qualified IPO in2006-2010as samples. I use EXCEL and Stata10.0software to analyze the data. In this paper, I use standard research combined with empirical research, to study whether the audit committee can improve enterprise IPO price, reduce enterprise first-day price fluctuations; tend to choose high quality auditors to improve the quality of financial reporting, obtain audit premium at the same time; and whether it affects the external audit.This paper is divided into seven parts:The first part is the Introduction. Introduce the background of the audit committee, the IPO system briefly and the significance of this paper. Then put forward the content, structure, ideas and methods of this paper.The second part is The Literature Review. As the following order: the effectiveness of audit committee in three sides:the internal governance, the external audit, and the market reaction. And the research about the characteristics factors of audit committee.The third part is the Theory Analysis. Introduce the origin of the audit committee system briefly. Comb the development of audit committee system in the United States and China. According to this paper’s research content, in order to clarify what is meant by corporate governance, the role of the audit committee in corporate governance. Expound the theoretical basis for research, including the Competitive Resource Theory, Signaling Theory and Audit Risk Model.The fourth part is the Empirical Research Model design and Sample Selection. First of all, ask hypothetical on the basis of the third part studies the hypothesis. Then, collect the data of A-share companies listed on the Shenzhen Stock Exchange as the research sample, and construct the basic model on the basis of predecessors’ research model proposed in this paper. Empirical analysis mainly from the following three aspects:(1) the effect of audit committee on IPO pricing, there is included on the first day of IPO pricing and issuance of under pricing rate.(2) The audit committee and the auditor choice.(3) The effect of the audit committee to external audit based on audit fee as the substitution variable.The fifth part is the Empirical Testing. Descriptive statistics for the variables of the research study is firstly analyzed, and then analyze the regression results by ordinary least squares regression and Heckman two-stage regression analyze.The sixth is divided into Conclusions and Policy Recommendations. According to the result of empirical test, obtain this paper’s research conclusion, and put forward policy Suggestions.The seventh part is the Research Limitations and Prospects. Summarize the limitations of this study, and discuss how to solve the shortage of the research for in the future.In this paper, empirical research results show that during the period of the IPO, the establishment of audit committee was positively correlated with the IPO price, and negatively correlated with first-day under pricing rate relations. Those cooperates which have Audit committee shall choose the auditor have high quality, but the result was not significant. In addition, the audit committee in the interaction with the external audit, more inclined to supervise external audit to invest more, to ensure that improve the quality of financial, but if the play a role in reducing risk control, this article hasn’t been able to verify. Seen from the empirical test results, in period of IPO, the audit committee is basic effective.Research contributions of this paper:Firstly, the existing research sample mainly aimed at listed companies, and discussed the utility of the audit committee after company listed. But there’s no article can focus on the audit committee release positive signals to the market in the period of IPO. Secondly, past research often stood in a single angle to explore the effectiveness of the audit committee, in this paper, I analyze the effectiveness of the audit committee during the period of the IPO from the investor (mainly institutional investors), enterprises and the auditor’s perspective, and it’s more comprehensive. Finally, the article is research on audit committee is the complement in the field of research; provide the material reality to the system construction. On the other hand, examine the effects of the audit committee system in China. On the other hand, provides the practical basis for the enterprise to perfect the corporate governance. The audit committee is an integral part of corporate governance, and plays an increasingly important role in modern society. Companies should set up perfect corporate governance structure as far as possible early.Limitations and future research directions:Firstly, I select the IPO market as the research object, the data is less. At the same time, most of the enterprises set up the audit committee in2007and beyond, and the company has not set up the audit committee is less. Subject to the conditions of the sample itself, I cannot make more tests. Future research can continue to expand the sample. Secondly, I failed to test the relationship between the audit committee and the risk control because of the limitation of research methods in this paper. Finally, I did not consider inquiry price on the model design, there is a dispute. In addition, many factors affecting IPO pricing and audit fees, though I control this as much as possible, but there are still some leak due to data collection, alternative variables are hard to find. The future direction of the research:firstly, join the characteristic factors into research, such as the age of audit committee; the independence, professionalism and activity of audit committee. Secondly, find out what kind of audit committee structure can play a better role in the future study. Finally, more abundant research method should be used to obtain data is difficult to use archival research.