Study On The Correlation Between Characteristics Of The Audit Committee And The Earnings Management In State-owned Enterprises

In the early 2000 s, a series of accounting scandals among those listed companies, such as Enron, Global Crossing and World Com, appeared in the US securities market. At the same time, China also witnessed many financial fraud cases, like YINGUANGXIA scandal. This type of fraud cases are mostly attributed to the inaction of regulators, including the Board of Auditors of course. How to strengthen the regulatory functions of the Board to reduce the level of enterprise surplus management and to improve the quality of external financial reports? This has become a research hotpot among many accounting scholars both at home and abroad recently.Because of the historical and institutional reasons, many listed companies in our country were separated from or merged into state-owned enterprises, thus having complex relationship with their parent companies in management. Due to our special institutional background, those state-owned listed companies gain interests of capital markets mainly by earnings management behavior, such as assets restructuring, related party transactions and using accounting policies. Besides, state-owned enterprises executives and government officials could have their roles reversed because of the special system in China. So it is common that government officials serve in the state-owned enterprises or enterprises executives depart into politics. Thus, compared with managements of non-state-owned enterprises, those of state-owned enterprises have greater control and voice, offering great convenience for them in earnings management. From this aspect, the state-owned enterprises executives have stronger incentive and possibility to sugarcoat the company by way of earnings management so as to get a "promotion" chance. State-owned enterprises occupy a leading role in the national economy and control the lifeline of it. So the supervision and administration of state-owned enterprises are important issues related to people’s livelihood.China has also stepped up efforts to fight corruption, and in recent years, more and more government officials and state-owned enterprises executives fell a cropper because of corruption.In the system of enterprises governance, the Board of Auditors occupies a decisive position. Chinese audit committee system was from the West, but it’s still in the primary stage. Has the Board of state-owned enterprises effectively shouldered the responsibility of the supervision?This paper is structured as followed. Chapter one is introduction. This part simply introduces the background and practical significance of the topic, and summarizes the main research results of accounting scholars both at home and abroad. Chapter two focuses on the theoretical basis of surplus management and the Board of Auditors. Chapter three describes the correlation between surplus management and the Board of Auditors as well as its theoretical basis. Chapter four is the empirical analysis. Limited by section amendment Jones model, this paper only selects data of 222 state-owned enterprises in 2013 as a sample. Nevertheless, the sample is compelling enough to effectively inspect the correlation between characteristics of the Audit Committee of state-owned listed companies and earnings management. Chapter five, based on the validation results and the actual conditions of our country, puts forward several recommendations to strengthen the construction of audit committee system. The research result shows that the Board’s independence and diligence are the most significant, and the stronger its independence and diligence, the lower the level of enterprise surplus management. The size of the Board of Auditors and financial professional level show a positive correlation, which indicates that simply expanding the Audit Committee or increasing the number of financial experts cannot effectively control the earnings management.