Empirical Study On Financial Fraud Companies’ Supervisor Subsequent Governance And Its’ Effect On External Audit

Financial fraud has been the focus of the practice community and academiccircles. The scholars generally agree that there are defects in the governancemechanism of financial fraud corporates, most of them research financialfraud from the standpoint of equity characteristics and governance of the board ofdirectors, however, the relevant research from the standpoint of the board ofsupervisors which takes responsibility for internal supervision is much rougher. Thissituation is also very common in China, but the internal supervision function ofChinese enterprises is divided into two parts—the board of supervisors andindependent directors. Effectiveness of independent director governance is notoptimistic, but its subordinate status of the board of directors which plays a decisiverole attracts researchers’ favour. In comparison, the power of the board of supervisorsis weak, governance effectiveness is low, it has been ignored for a long time becauseof its position of "useless".This phenomenon can not explain that the board ofsupervisors system in our enterprise has become perfect, on the contrary, thismechanism needs thorough analysis and substantial improvement. The board ofsupervisors system originated in Germany, then it was adopted by Japan, itis worthy of profound thinking that their effectiveness of supervision are both higherthan the level of Chinese enterprise. At the same time, the scholars always payattention to cause analysis of financial fraud, but ignore subsequent governance afterfinancial fraud, then this kind of research is not instructive for financial fraudcompanies. Consequently, this article researches financial fraud and external auditfrom the perspective of supervisor subsequent governance, then further discusses theexistence of complementary relationship between two kinds of supervisionmechanism.This paper is based on literature review and situation analysis, consultingrelevant theories, then proposes hypotheses and constructs the model. It choosesviolation cases condemned publicly between2004and2008, analyses ranging fromthe year before the announcement year to the third year after the announcement year,so data from annual report covering from2003to2011. Using Excel2003to screen48fraud samples and48control samples from two stock markets in China. After that, itdoes paired sample T-tests and logistic regression with the use of Stata11.0,researching supervisor subsequent governance and its’ effect on external auditbetween the year before the announcement year and the third year after theannouncement year. The main conclusions are as follows: firstly, after financial fraud,the scale of the board of supervisors decreased slightly, shareholding ratio wasextremely low, the ratio of employee supervisor maintained the basic level, independence was limited, the meeting was more frequent, a small scale of supervisorchanged. In general, supervisor subsequent governance didn’t have high performance,but it adopted certain measures in some respects to improve the supervisorship.At thesame time, the ratio of external audit change was low, collusion behaviors may exist.Secondly, the ratio of auditor change is positively associated with the meetingfrequency after financial fraud. Thirdly, financial fraud is the key factor to stimulatethe utility of the board of supervisors, usually there are existence of complementaryrelationship between two kinds of supervision mechanism after financial fraud.Finally, with theoretical research and empirical analysis aboved, the articleproposed the following suggestions: improve the board structure in supervisorsubsequent governance, standardize the board behavior in supervisor subsequentgovernance, improve the board governance efficiency before finacial fraud anddefine external auditor responsibilities, regulate the audit market.