An Empirical Study On The Correlation Between Audit Quality And Earnings Management In Private Placement

Since the promulgation of the "Measures for the Issuance of Securities Issuance by Listed Companies" on May 8,2006,the advantages of private placement,such as flexible issuance,low issuance cost and simple review procedure,have become the main ways to finance listed companies gradually.Compared with IPO,allotment and the issuance of new shares,private placement has become a relatively high degree of market financing.According to the "Measures for the Issuance of Securities Issuance by Listed Companies",the object of the issuance of new shares is mainly institutional investors with professional investment judgment ability.Therefore,China's securities regulatory authorities have not made any demands on the issuance of private placement,even if they are at a loss,Listed companies can also be financed through private placement.However,the rapid rise of private placement is not accompanied by a sound corporate governance and sound supervision mechanism,and China's capital market is still in the initial stage,there are many market flaws and regulatory loopholes,so that the major shareholders have incentives before the issuance of earnings Management to seek personal gain.As the listed companies in China generally exist "a dominant" phenomenon,the major shareholders often hold the main control of listed companies,therefore,in order to maximize their own interests,the major shareholders manipulate the share price,through the management of the issuance of earnings before the issuance of earnings management encroaching on the interests of small and medium shareholders and external investors.And compared to other distribution methods,the SFC sets lower entrance standard for the placement of the threshold,and make a unclear request for the quality of its information,which also provide a space for manipulation for the major shareholders' opportunistic behavior.There have been many scholars who have found that the motives for the earnings management before the private placement are:(1)to carry out the interests of the major shareholders;(2)to raise the issue price of new shares to maximize the value of the company.However,how does management transport interests to the large shareholders in the process of private placement through earnings management?Will the earnings management approach of management be different when the target issuance is different? Because of the prevalence of earnings management,it is difficult for investors to make effective investment decisions through the accounting information disclosed by listed companies.Therefore,an effective external supervisory authority is needed to alleviate the information asymmetry between investors and listed companies.As an independent third party,auditors can effectively alleviate the information asymmetry between investors and listed companies,at the same time make an effective assessment and certification of the listed company's financial reports and operating conditions And high-quality audit can give effective identification and disclosure of listed companies "bad" behavior,which can protect the interests of small shareholders and investors.In this way,can high-quality audit effectively inhibit the earnings management behavior of major shareholders before private placement ?In this paper,the author analyzes the relationship between earnings management one year before private placement,audit quality and earnings management before private placement,The paper analyzes the effect of the deep pocket theory,the signal transmission theory and the reputation theory on the audit quality.As large accounting firms will develop more rigorous audit procedures to improve their audit quality in order to maintain their reputation,auditors with industry expertise are more able to detect potential corporate fraud.Therefore,this paper evaluates the audit quality from two aspects: the size of the auditor's accounting firm and the auditor's industry expertise.We select the enterprises from 2006 to 2015 as the sample,using the comparative analysis of the sample,the multiple regression and other methods to examine the quality of auditors and the relationship between earnings before the issuance of earnings management.The empirical results show that the private placement company will base on the new shares' different subscription objects to decide different types of earnings management.When the new shares' subscription objects are institutional investors,the management will issue positive earnings management in the year before the private placement to push up the stock price,maximizing the value of the company.However,when new shares' subscription objects are major shareholders and their associated shareholders,the management will issue negative earnings management in the year before private placement to reduce additional price,and transport interests to the large shareholders.As a third independent party of listed companies and investors,auditors play an irreplaceable role in alleviating the asymmetry of information and curbing the "fraud" behavior of listed companies.When the target issuer is an institutional investor,auditors from a large accounting firm and an industry specialist auditor can effectively identify and disclose their positive earnings management behavior prior to private placement.Thus effectively inhibit the directional issuer in the year before the issuance of positive earnings management;and when the subscription object of private placement are major shareholders and their associated shareholders,the auditors from the large accounting firm and industry expertise auditors can also effectively identify and disclose negative earnings management behavior in the year prior to private placement,thereby inhibiting the negative earnings management of the management authorities one year prior to private placement,effectively protecting the interests of small and medium investors and reducing the chances of major shareholders Doctrine.The main contributions of this paper are as follows:(1)This paper examines the way of earnings management in the course of private placement of listed companies.It is found that when listed companies introduce private shares to institutional investors,they will make positive Earnings management;and as for the major shareholders and their associated shareholders,listed companies will issue negative earnings management in the year before the negative earnings management,revealing the purposes and means of earnings management listed companies in the process of private placement.(2)Although there are many studies on the earnings management behavior of listed companies and the impact of audit quality on earnings management,there are few literatures studying on the impact of audit quality on earnings management in the process of private placement.This paper can enrich the impact of audit supervision on earnings management in China by studying the impact of audit quality on earnings management of listed companies in the process of private placement.(3)Based on the theory of reputation,deep pocket theory and so on,the audit quality is measured from the perspective of the size of the accounting firm and the auditor's industry expertise.The quality of the audit is tested separately for the directional issuance of the company in different directions.The impact of earnings management can enhance the awareness of auditors' supervisory role as an external governance mechanism in restraining pre-emptive earnings management.