A Related Research Between The Behaviors Of The Special-Treated Companies' Turning Losses Into Gains And Auditor Switches And Earnings Management

According to the regulations of China's two stock exchanges, if the listed companies' net income is negative for two consecutive years, these listed companies will be Special Treated(ST) which means these companies are warned for their financial difficulties. And if the listed companies' net income is negative for three consecutive years, these companies will be suspended to list on the stock exchange. Because of the great advantages that listing on the stock exchange can bring to a company, companies faced with the financial distress are eager to turn the loss es into gains to make sure they are still on the list of the stock exchange. But it is very difficult for the ST companies to improve their financial performance and it is comparatively easy to use the non-recurring gains and losses to manipulate the profit, so this way becomes the best choice for the ST companies. What's more, being the signal to convey the news whether the company runs well or not, the clean audit opinion plays a vital important role for the ST companies to persuade the public to believe their financial improvement.Since 1998 when the stock listing rule was just implemented, Shanghai Stock Exchange has gone through nine revisions and Shenzhen Stock Exchange has gone through eight revisions till now. The order of the securities market has seen a continuous improvement to regulate the companies listed on t he market. To identify the behaviors of changing the auditors and managing the earnings among the ST companies can provide empirical evidence to improve the list and de-list system.On the basis of the previous research, this paper mainly identifies the abnormal behaviors of the ST companies from the aspects of the auditor switch and earnings management. The result shows most of the ST companies chose to change the previous auditor to a smaller one to buy a cleaner audit opinion and they always chose to change the auditor at relatively late time. In addition to this, the ST companies do use the non-recurring losses and gains to add their net income in the year when turning loss into gains.