Internal Control Quality、auditor Efforts And Financial Statement Restatements

Frequent restatement of financial statements will damage to the reliability and timeliness of financial statements which has been disclosed. It is a manifestation of poor quality of financial information. If the content of restatements related to the key financial information even the profit of companies, this indicating the worse problems of financial information. By using data of A shares and B shares from listed companies besides the financial industry on the stock market of Shanghai and Shenzhen during 2008 to 2013 as example, we empirically examine the effects of internal control quality, auditors’ effort impact on the financial restatements. By classifying financial statements into “technical restatements”, “economic restatements” and “negative earnings restatements”, we further explore the different functions of internal control quality and auditors’ effort in reducing financial errors and discuss the joint mechanism between them.There are five chapters in this paper. Chapter 1 is introduction. Chapter 2 is a literature review on the relationship among internal control quality, auditors’ effort and financial restatements. Chapter 3 introduces theoretical basis and research hypothesis. The hypothesis is underpinned by the definition of internal control quality, auditors’ effort and financial restatements, the modern risk-oriented audit theory. Chapter 4 is the research design and empirical analysis, which introduces the sample selection and data sources, variable definition, model construction and empirical test. Finally, Chapter 5 is the result of this paper. It concludes the dissertation by stating its research conclusions, and putting forward policy recommendations, limitations and future prospects.The major conclusions of the dissertation are as follows:1. Analysis of modern risk-oriented audit theory suggests that effective internal control and more auditors’ effort all can reduce the problems of companies’ financial information, thus contributing to suppress the occurrence of financial restatements. Theoretical analysis also shows that, in this process, auditors will adjust the level of their effort based on the internal control quality of their clients. So, there is a joint mechanism between internal control quality and auditors’ effort in this process.2. The results of data test shows that the higher quality of the internal control is related to less financial restatements, however, auditors’ effort and the probability of financial restatements are positively related. Thus is discrepancy with the theoretical analysis.3. The results of data test after classifying financial restatements into three groups shows that:(1) Higher quality of the internal control can only suppress the occurrence of “technical restatements”, when it comes to “economic restatements” and “negative earnings restatements”, there is no significant correlation. Thus indicates that internal control’s work focuses on general technical errors of companies.(2) More auditors’ effort can significantly suppress the occurrence of "economic restatements", especially, the occurrence of "negative earnings restatements". Thus indicates that auditors’ work focuses on material accounting errors of companies, especially the errors that will inflate earnings.(3) When companies’ internal control quality is high, the level of auditors’ effort will be significantly lower. Lower internal control quality of companies will result in the failure of auditors’ effort to suppress the occurrence of “economic restatements”. Thus indicates that auditors will make more effort for the weak internal control, and the company’s internal control quality constitute of the functional environment of auditors’ effort.