A Research On The Relationship Of Internal Control,Auditor Industry Expertise And Financial Restatements

As the carrier of financial information,the financial report published by enterprises,on one hand,can help investors master the relevant information.On the other hand,it can optimize the investment decisions of investors.Originally,the financial restatement was a rectified mechanism to promptly correct the relevant information to avoid stakeholders' heavy losses.But in recent years,the financial restatements gradually evolved to be tools for managers to manipulate earnings.It greatly reduced the reliability and authenticity of the financial report,caused lots of economic consequences,such as the loss of investor's confidence and the failure of the allocation of resources.The financial restatements gained widespread concern.By standard or empirical research,scholars all over the world tried their best to find the reason why the companies restated,and explore the measures that can effectively restrain the financial restatements.They found that the internal control and auditor industry expertise both have a certain influence on the accounting information and financial reports.Essentially,the financial restatement was a remedial measure.When enterprises published false financial reports,they corrected the financial data by disclosing supplement or correction announcements.So,can the internal control and auditor industry expertise influence the financial restatements? If so,is there a relationship between the internal control and auditor industry expertise,is the relationship replacement or complementary? These are the issues to be discussed in this paper.This paper aims to study the relationship of internal control,auditor industry expertise and financial restatements.It can provide suggestions for the enterprises to complete the internal control system,as well as improve the quality of internal control.At the same time,this paper can contribute to the reasonable selection of the external auditor for enterprises' managers and improve the decision usefulness of the accounting information.The main part of this paper uses normative analysis and empirical analysis to research the relationship of internal control,auditor industry expertise and financial restatements.The writing path of this article is as follows.Firstly,the related concepts of financial restatements and auditor industry expertise are defined.Secondly,this paper theoretically discusses the impacts of internal control and auditor industry expertise on the financial restatements and the relationship between the two factors,as well as put forward hypotheses.Thirdly,this paper adoptsinternal control index,takes its natural logarithm to measure the internal control quality of the corporate,selects auditor's market share in the industry as auditor industry expertise,and obtains the relevant data from the DIB database and CSMAR database.Finally,this paper verifies the three hypotheses through empirical analysis,then draw some conclusions.The empirical results show that the internal control quality of the enterprise will affect the financial restatements' incidence rate,companies audited by the accounting firm with the industry expertise can also reduce the probability of occurrence of financial restatements in a certain extent.The internal control and auditor industry expertise can effectively restrain the financial restatements,and improve the quality of information and the decision value of financial reports.At the same time,the regression results of the sample data show that the internal control will weaken the effect of the auditor industry expertise on reducing the likelihood of financial restatements,the role of internal control and auditor industry expertise in the inhibition of financial restatements are alternative.Therefore,enterprises should combine related system and unit corresponding organizations,construct enterprise culture and establish salary system,then give full play to the supervisory departments and audit mechanism.And enterprises should not simply improve the quality of internal control or engage firms with auditor industry expertise to deal with financial restatements,but should weigh each influencing factor to minimize the incidence of restatements.The accounting firms should pay attention to the training of industry expertise,build the brand of local firms with good image and high quality,and then form a mature audit service system.China should speed up the perfecting progress of relevant laws and regulations,build a unified standard of financial restatements,and standardize the financial restatements of enterprises.The innovation of this paper is that there are much literature about internal control and financial restatements,or auditor industry expertise and financial restatements.But yet there is no scholar who studies the relationship between the two factors in influencing financial restatements.This paper not only verifies that there is significant negative correlation between both the internal control with financial restatements and auditor industry expertise with financial restatements.But also,it divides the sample into good and poor internal control group,conducts the cross multiply of internal control and auditor industry expertise.Then,the logit regression is conducted respectively.So,we draw the conclusion that there is an alternativerelationship between the internal control and auditor industry expertise in restraining financial restatements.On one hand,not only the effect of a single factor is included in this paper.But also,it involves the relationship of several factors.On the other hand,this article provides the enterprises with the ways to curb the occurrence of financial restatements,and also help the enterprises weigh the multiple measures,and choose the most appropriate way to reduce the probability of financial restatements.