Empirical Study On The Relationship Among Independent Director’s Social Capital, Audit Committee And Audit Quality

In2001, China began the formal implementation of the independentdirector system in all listed companies. The introduction of independentdirector system helps improve corporate governance structure, and strengthenthe independence of external audit. This paper argues that the independentdirector system in terms of the cause, or from our original intention to bring theindependent director system, monitoring internal controls, improve auditorindependence and ensure the quality of audit reports, is the most essential andimportant functions of independent director. And the audit committee as animportant system bring in to china after independent director system, willprovide an institutional guarantee to independent director system. As the lawrequires the board of directors of listed companies should establish AuditCommittee, and the majority members of the Committee should beindependent directors in China. It can be seen, the Audit Committee is animportant institutional arrangements for the independent directors to fulfill itsmandate, and further to add to the independent director system in China. TheBoard’s governance efficiency, will affect the effectiveness of independentdirectors system, in particular the effect of the supervision of external audit,thereby affecting the quality of audit reports. Therefore, this article will studythe effectiveness of independent director supervision on external audit fromthe perspective of social capital, with the audit committee’s governanceefficiency, and we will use audit quality of the company to measure the effect ofthe independent director’s audit supervision.Based on the comprehensive study of previous scholars, the papermakes the independent directors of social capital concepts into easy-to fourdimensions: horizontal network of independent directors, vertical network ofrelationships, reputation and cognitive dimensions. We also considered theindependence, professionalism and diligence of the audit committee. Byselecting the2007-2009three-year361sample of listed companies in small plates, and the use of correlation analysis, multiple linear regression analysisand other statistical methods, we analyzed the degree of relevance of socialcapital of the independent directors of the company and audit quality. Theempirical results show that the reputation of the independent directors, verticalnetworking and research institutions cognitive dimension have a significantpositive correlation with audit fees, and the horizontal dimension of the networksize and degree cognition of the independent directors are significantlynegative correlate with audit fees. Thus we believe that the reputation，thenature of working units of the independent directors play a supervisory role onthe company hiring external auditors. But the impact of the horizontaldimensions and the degree cognition require a combined analysis of internalcontrol supervisory role of independent directors. The study also found that theefficiency of the Board’s governance, Especially diligence and professionalismplay an important influence to the external audit oversight function ofindependent directors. In short, this study suggests that independent directorshave basically played a supervisory role, and the social capital of independentdirectors has an important influence to their oversight function. Finally, basedon empirical results, the author make some recommendations respectivelyfrom the independent director system and the Audit Committee, to furtherimprove the independent director system to fully play its oversight role, andimprove the quality of company audit reports.