A Comparative Study On The Reliability Of Voluntary And Mandatory ICFR Audit Reports

Since the U.S.enacted the Sarbanes-Oxley Act,the capital market has become more and more concerned about the company's internal control mechanism.The 404b clause mandates that all the U.S.accelerated filer companies should implement the audit of internal control over financial reporting(ICFR).Since then,ICFR audit has been considered as an important risk management tool for enterprises.The MOF issued the"Guidelines for Internal Control Auditing of Enterprises"in 2010,the main-board listed companies in Shanghai and Shenzhen Stock Exchange would gradually carry out mandatory ICFR audit since 2011 At the same time,other listed companies such as SMEs and GEMs were encouraged to do voluntary ICFR audit.Under such a policy background,many domestic and foreign scholars have carried out rich researches on ICFR audit.Many scholars have found that because of audits and companies themselves,the number of companies that are issued non-standard ICFR audit opinions are fewer and fewer,therefore,many scholars worry about the reliability of ICFR audit reports.If the audit conclusion cannot reveal the company's internal control weaknesses,it would give investors a misleading signal to make wrong decisions,and even lead to a larger market reaction when these internal control weaknesses are discovered later,which is very unfavorable for the company and all the market.Therefore,whether the ICFR audit report is reliable has already attracted wide attention in the capital market.At the same time,due to the special background of China,many companies have already conducted voluntary ICFR audit.Voluntary ICFR audit has self-selection function.Generally,only companies with better internal control quality would perform it,In addition,voluntary ICFR audit also have signal transmission function.Companies that conduct voluntary ICFR audit has a better market response and can be distinguished with the poor internal control quality companies.However,there are many differences between them,in terms of signaling,monitoring,insurance roles and etc.Therefore,is the reliability of the audit report issued by the mandatory ICFR audit higher than the voluntary ICFR audit?At the same time,there are a large number of companies in China that have changed from voluntary ICFR audit to mandatory ICFR audit.For these companies,does the mandatory ICFR audit conversion further improve the reliability of ICFR audit reports?What is the net effect of this policy?To explain the above problems,we take the 2007-2017 A-share companies listed on both Shanghai and Shenzhen stock exchange as the research sample,hand-collect the relevant data of ICFR audit,and use the DIB internal control weaknesses index and financial statement restatement to measure the company's internal control quality,to research whether the ICFR audit reports are reliable.At the same time,in the background of the coexistence of voluntary and mandatory ICFR audit in China,we compare the reliability of ICFR audit report between the companies that have already done voluntary ICFR audit and the companies that are directly to do mandatory ICFR audit,then compare the reliability differences between voluntary and mandatory ICFR audit reports.In order to further study the implementation effect of the policy,we use the difference-in-difference mothod to study whether the mandatory ICFR audit policy improves the reliability of the ICFR audit report.The regression results show that:(1)The reliability of ICFR audit reports in China is good,that is,companies with internal control weaknesses can receive non-standard ICFR audit opinions;(2)Compared with the companies that do mandatory ICFR audit directly,companies that have voluntarily implemented ICFR audit are more likely to be found the internal controls problems,thus they are more likely to be issued non-standard ICFR audit opinions,so their audit reports are more reliable,but the difference is not significant;(3)The reliability of the mandatory ICFR audit reports is stronger than the voluntary ICFR audit reports;(4)Cormpared with the voluntary ICFR audit before the policy,the reliability of the ICFR audit reports are enhanced after the i:mplementation of the policy,that is,the mandatory ICFR audit policy improves the quality of ICFR audit.The research in this paper has innovated the current definition of internal control quality and ICFR audit quality,enriched the literature on ICFR audit related research,and made certain contributions to the comparative study of voluntary and mandatory ICFR audit Simultaneously,The conclusions of this paper have a great reference for the implementation of mandatory ICFR audit policy,which helps the regulatory agencies to fully understand the implementation of the policy,and provide a theoretical basis for the extension of the policy to the SME and the GEM.