Case Study Of ER-KANG Audit Opinion Purchase

Due to the late start of capital market in China,the development of external independent audit market is not perfect at this stage.The demand of listed companies for external independent auditing stems from the mandatory requirements of government supervision departments.Moreover,listed companies often have problems related to internal controllers,which will lead to the integration of clients and auditees in audit work.Therefore,the original independence of external audit work will inevitably be adversely affected.When a listed company has the motive to whitewash its financial statements,in order not to expose the fraud,it often buys the accountants.At this time,the information reflected in the financial statements issued by the listed company with standard audit opinions is unreliable.Once the accountant conspires with the auditee,the relevant users of accounting information will make wrong decisions according to the type of audit opinions.The purchase of audit opinions of listed companies will damage the rights and interests of stakeholders and affect the sound development of capital market.Past studies have found that firms buy auditors’ opinions by increasing audit fees in order to cover up their financial fraud.This paper takes the purchase of audit opinions of HUNAN ER-KANG PHARMACEUTICAL CO.,LTD.as a case study,combining with the administrative penalties imposed by the SFC on ER-KANG in 2018 and the financial statements information of ER-KANG.Estimated audit cost of ER-KANG was estimated by audit cost estimation model,and compared with actual audit cost of ER-KANG from 2013 to2017.In order to strengthen persuasion,the audit cost estimation model was replaced to calculate the estimated audit cost of ER-KANG again.Two comparative enterprises were selected from the same industry perspective and the same accounting firm perspective.Thedifference between estimated audit cost and actual audit cost of each enterprise was compared with the model to verify that the actual audit cost of ER-KANG was unusually high.Through the analysis,we found that the audit cost of ER-KANG was on the high side between 2013 and 2017,especially after the financial fraud of ER-KANG in 2015,the audit cost of ER-KANG was much higher than the estimated audit cost.It is concluded that ER-KANG is purchasing audit opinions on Pan-China Certified Public Accountants through excessive audit fees.This paper analyses the reasons of ER-KANG Audit Opinion purchasing from three perspectives of audit opinion demand,audit opinion supply and market supervision.The main reasons are that actual controllers have the need to cash in;before and after the occurrence of false statements,ER-KANG has repeatedly restated financial statements on the grounds of staff negligence;relevant intermediaries are negligent,which is ER-KANG’s false statements.Provides the environment;the enterprise carries on the financial fraud punishment cost is too low and the CPA profession supervision is weak.Finally,the conclusion is that ER-KANG has the motivation to whitewash its financial statements,and it purchases Pan-China Certified Public Accountants’ audit opinions by raising audit fees in a more covert way.According to this content,this paper will start from several different perspectives,and put forward a series of targeted opinions combined with market supervision and the supply and demand of audit opinions.