External Prevention And Treatment To Financial Fraud Based On The Game Theory

Financial fraud refers to that the management of the listed companies intentionally modify or lie about the information on the financial statements in order to obtain illegal benefits.The financial information quality publicly disclosed in the capital market will directly affect its running condition.The information which is in the financial statements disclosed by the listed companies has a great effect on the investors’decision for the investors analyze those companies’financial statements and then decide where or not the company is worth investing in.In the past ten years,the companies of our country have more and more fiery tendencies to practice fraud. Listed companies frequently varnish its financial statements by disclosing false information so as to distort the financial information for illegal interests, which affect the investors’decision.These financial frauds not only bring huge losses to the investors,but alse have a bad influence on socity.In addition,they harm the running of the economy and undermine the resource allocation of the capital market.Meanwhile,they violate the principle of being impartial,open and fair on which the capital market rests for its operations.Given this.the way how to govern financial fraud of listed companies in our country has always been a important topic in academia.According to the game theory, There is always a game between company managers and external auditors:the managers may have the financial fraud motive for individual or collective interests,and the auditor’s occupation accomplishment, professional skills and experiences as well as the level of effort is crucial to audit quality, further it may affect the company managemers" behavior. Therefore, the research on the game between management and the auditor has a very important significance on governing the financial frauds and improving the external audit supervision on company.This article constructs a dynamic game model for corporate financial fraud and external auditing on the basis of a series of fundamental assumptions. Through the discussions of the equilibrium results, it analyzed the optimal strategies for both corporate managers and external auditors, also the possible results of the repeated games. After analysesing factors influencing the recommended optimal choice of the company’s managers and external audit, we try to provide ideas about financial fraud prevention and treatment,which stood from regulatory authorities and external auditors.At present, internal audit system in chinese listed companies is imperfect, and internal governance is unreasonable, in this case, we can reduce the possibility of fraud by external financial fraud prevention and treatment.