Managers Incentives And The Demand For External Audit

ABSTRACT:Principal-Agent problems have arisen in the separation of ownership and management of modern enterprises. In order to decrease the agency costs, the management incentive has been introduced into the modern enterprises gradually.As the external supervision and bonding mechanism, high quality audit can ease the conflicts of agent simultaneously. The two important corporate governance mechanisms play comparable roles in terms of easing the conflicts of agent. However, there are few studies aimed at the relationship between the two mechanisms. This paper discussed about how management incentive influences the requirement of external audit, which is important for improving the management incentive of listed companies in China and fulfilling function of auditing in security market.This article discussed about the relationship between the listed companies in China and the requirement of high quality audit, from the aspects of managerial ownership, equity incentives and salary incentives. It used both the scale of accounting firms and audit fees as the variable substitution of audit quality, inferred how different incentives affect the requirements of auditing from the perspective of agency theory.This article used data from security market from2008to2012and relevant models to test how different management incentives influence the requirements of external auditing of listed companies in China.This article concluded that managerial ownership decreases the requirements of high quality audit in listed companies. The different share proportions have different effects on the requirements of auditing. It is obviously that stockholders reduce the requirements of high quality auditing in the listed companies that have equity incentives. Meanwhile stockholders reduce the requirements of high quality auditing in the listed companies that have compensation incentives.This article also concluded that compensation incentive has less influence than equity incentives in terms of requirements of high quality auditing. We found that state-owned listed companies had a more conspicuous decrease in requirements of high quality auditing after they carried out the management incentives than non-state owed enterprise.This article studied the management incentives in the perspective of auditing, and tested the results of reducing cost of agent from varieties of incentives. It provided a new design of management incentive system. Scholars in China mainly studied about managerial compensation, but this article focused on managerial ownership and stock option, enriched relevant research literatures, provided some recommendations concerning management incentives.