انسجام اجرایی، تفتیش عقیده و تقلب در شرکت های فهرست شده چینی
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17772||2013||20 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Emerging Markets Review, Volume 15, June 2013, Pages 72–91
We examine the influence of auditors on mitigating corporate fraud in China, which is known to have weak legal enforcement, weak investor protection along with tight control of the media and labour unions. We find that firms with executives that have lower integrity, indicated by a greater degree of earnings manipulation, are associated with higher propensity of regulatory enforcement actions against corporate fraud in the subsequent year. We show that this effect is moderated by the issuance of a modified audit opinion report by the auditors. This finding implies that auditors can serve as external governance mechanism to discourage executives with lower integrity in committing fraud. Our results have policy implications for further strengthening auditor independence in emerging countries like China.
In this paper, we seek to examine whether auditors contribute to corporate fraud deterrence in China. Over the past decade, a string of financial scandals and high profile corporate frauds have shaken investor confidence and increased financial market instability in many developed economies. Following the most recent financial crisis, where corporate governance deficiencies were seen to result in fraud in its most extreme cases, is a topical issue and has prompted regulatory reform in both developed and emerging markets. The Dodd-Frank Act in United States (“the US”), and the Interim Measures for the Supervision and Administration of Integrity in the Securities and Futures Markets and Code for Governance of Securities Companies in China are examples of such reactions to calls for regulatory reform. In many emerging markets however the weakness of internal and external control mechanisms remains to be a serious problem. In such institutional environments, managerial integrity plays a crucial role in mitigating corporate fraud while auditors serve an increasingly important function as an alternative control mechanism. Since China is seen as a leading emerging economy yet one that is in transition, we believe our study has wider implications for other developing countries. Integrity is defined by Erhard et al. (2007) as “a state or condition for being whole, complete, unbroken, unimpaired, sound, perfect condition.” They distinguish between integrity for an individual as being solely a matter of that person's word, and for a group or organizational entity as being comprised solely of what is said by or on behalf of the group or organization. They argue that for these entities to have integrity, they must honor their words. Jensen et al. (2004) suggests that integrity may be lacking in the course of financial reporting choices, as managers are motivated to manage “street” expectations. They argue that “managing earnings” amounts to lying to shareholders to whom managers have fiduciary responsibilities. Based on these arguments, the degree to which firms manage their earnings can serve as an empirically observable proxy for managerial or executive integrity. Dikolli et al. (2012) provide empirical evidence of an association between managerial integrity and earnings management. They measure CEO integrity based on employee surveys and annual shareholder letters. They find that the CEO integrity measure is positively related to earnings quality as measured by accruals. We note of course, that in addition to managerial integrity, earnings management can also be affected by weaknesses in internal and external control. Therefore, we believe to empirically research the application of earnings management measures as a proxy of CEO integrity, it is important to control for corporate governance characteristics. Top management characteristics have also been identified as an important determinant of corporate fraud (e.g. Ashforth and Anand, 2003 and Baucus, 1994), where fraud is defined as the deliberate actions of management to deceive, swindle, or cheat investors or other stakeholders (Zahra et al., 2005). Other determinants identified by extant literature includes organization culture (e.g. McKendall and Wagner, 1997), board composition (e.g. Dunn, 2004), regulatory conditions (e.g. Hou and Moore, 2010), environmental hostility (e.g. Baucus and Baucus, 1997), environmental dynamism (e.g. Hansen et al., 1996), industry cultures (e.g. Baucus and Near, 1991), and industry concentration (e.g. McKendall and Wagner, 1997). Black (2005) classifies corporate fraud into opportunistic and reactive. The former occurs when executives seize an opportunity for enhance gains by manipulating disclosure and the latter occurs when executives respond to declining firm performance by window dressing financial statements. Corporate fraud results in serious consequences to stakeholders, employees, and the wider society (e.g. Davidson and Worrell, 1988, Szwajkowski, 1985 and Zahra et al., 2005) therefore it follows that fraud deterrence has been widely studied. In terms of fraud deterrence however, the literature largely focuses on internal corporate governance mechanisms. For instance, board independence, the existence of an audit committee, and the presence of accounting and banking professionals on the committee decreases the incidence of fraudulent activities (see Beasley, 1996, Beasley et al., 2000, Dechow et al., 1996 and Uzun et al., 2004). Denis et al. (2006) find that option intensity in CEO remuneration encourages risk taking and induces fraud, while Erickson et al. (2006) show that the exercise of executive options and sales of executive stocks are not significantly higher for fraudulent firms. External governance mechanisms such as investors, employees, analysts, auditors, media, and regulators are relatively less examined in the literature. Among them, Dyck et al. (2010) provide evidence that investors and auditors contribute less to fraud detection in the US than employees, media, and industry regulators. China provides a unique setting to examine the efficacy of deterrence mechanisms against fraud due to its institutional setting as a transitional economy. Compared to Western developed countries, China is known to have weak legal enforcement and shareholder protection (Allen et al., 2005) as well as tight control of the media (Besley and Prat, 2006) and labor unions. As a result, external governance mechanisms are expected to be less effective compared to internal governance mechanisms. Indeed, studies of fraud deterrence in China have also largely focused on internal governance mechanisms and mainly affirm inferences of studies based on Western developed countries. For instance, lower corporate fraud propensity is documented among firms with more independent directors (Chen et al., 2006) and larger supervisory boards (Jia et al., 2009). Thus, there is limited study of the role and efficacy of external fraud deterrence mechanisms in China given its institutional background. We believe however that although such an environment limits the power of investors, media, and employees, there is no established reason to believe that auditors cannot play a role as an external deterrence mechanism against corporate fraud. In fact, assuming auditor quality is broadly similar and all else being equal, we expect the contribution of auditors toward fraud deterrence to be greater in China relative to Western developed countries where investors, media, and employees are more active. Auditors play an important role in maintaining the credibility of financial statements issued by firms. Positive accounting theory (Watts and Zimmerman, 1990) stipulates that managers have incentives to manipulate financial statements whenever contracts or regulations are based on accounting numbers. Financial statements are an important source of information to investors for securities valuation before they commit their capital and for monitoring purposes after they commit their capital. As a result, auditors help curb managers' motives to window dress their performance and uphold the interest of outside investors due to their information disadvantage. The contribution of auditors to facilitate capital acquisition (Johnson and Lys, 1990) and reduce information asymmetry (Datar et al., 1991) is more pronounced in weaker than stronger legal environments (Choi and Wong, 2007). Therefore, the potential value of auditors is expected to be high in China. Given the above discussion on managerial integrity, corporate fraud, the Chinese setting, and auditors, we formulate our testable research hypotheses. First, we predict firms with lower managerial integrity are more likely to instigate corporate fraud. Second, auditors are more likely to detect financial statement problems among firms with lower managerial integrity. Finally, auditors are able to reduce the propensity of corporate fraud among firms with lower managerial integrity. To test these assertions, we apply a sample of Chinese listed firms over the period from 2001 to 2008. We identify corporate fraud cases based on enforcement actions by the Chinese Securities Regulatory Commission (CRSC), which is the main regulator of the Chinese stock market. We measure managerial integrity based on earnings management proxies as non-operating income relative to sales. We capture the effect of auditors through the issuance of a modified audit opinion against financial statements issued by firms. Our empirical findings are consistent with all three aforementioned predictions. Our results are robust to the control of firm characteristics, corporate governance variables, as well as industry and region fixed effects. The main policy implications of our study is that in emerging countries like China, where external governance mechanisms are likely to be relatively weak, it would be beneficial to strengthen the quality and independence of auditors. Government initiatives could be established to enhance the auditor profession through improved training and acquiring expertise from abroad. By increasing the credibility of financial statement information, the efficiency of financial resource allocation in capital markets can be enhanced, and this in turn benefits economic development and growth. In terms of connection to extant literature, our study complements other existing studies on auditor issues in China. Previous studies provide evidence that Chinese firms avoid more independent auditors (DeFond et al., 2000), and this effect is found to be more pronounced in less developed regions (Wang et al., 2008). These findings that Chinese firms opportunistically dodge the scrutiny of more reputable auditors in less developed regions can be interpreted as evidence that auditors are recognized as an influential external governance mechanism that outside investors in weak legal environments depend upon. Our findings essentially substantiate this conjecture. We note however that one potential limitation of our study is the way managerial integrity is measured in our research design. Dikolli et al. (2012) suggest that it is very difficult to come up with an empirical measure that captures the concept of “honoring one's words”. Jensen (2011) however regards earnings management as lying since it erodes integrity and destroys long-run value. Extant literature also reinforces Jensen (2011)'s assertion that earnings management amounts to lying to investors, therefore we believe that albeit an indirect measure, the use earnings management as proxy for the lack of integrity is appropriate. We acknowledge however that the data do not allow us distinguish between the integrity effects of the executives collectively or of the CEO, which may arguably matter more. This paper proceeds as follows. Section 2 reviews the literature and develops the hypotheses. The research design and sample data are introduced in Section 3. Section 4 reports and discusses the empirical findings and Section 5 concludes the paper.
نتیجه گیری انگلیسی
This study examines the efficacy of auditors as an external governance mechanism to curb corporate fraudulent behaviour among Chinese listed firms with higher earnings manipulation, which we use as proxy of low executive integrity. Corporate fraud reduces the confidence of outside investors and the stability of capital market, which in turn hampers the growth and development of emerging countries. China is a leading emerging economy and provides a suitable setting to study the contribution of auditors to corporate fraud deterrence because it has weak legal enforcement and investor protection along with tight control of the media and labour unions. Under this institutional environment, other external governance mechanisms such as investors, media, and employees are expected to be less effective in deterring managerial opportunism compared to their counterparts in Western developed economies. This leaves auditors to serve as one of the few credible sources of external governance mechanisms capable of discouraging opportunistic behaviour of managers. Indeed, our empirical evidence suggests that Chinese listed firms with a greater degree of earnings manipulation, which we assume proxies for lower managerial integrity, are associated with a greater likelihood of regulatory enforcement actions against corporate fraud. This effect is moderated by issuance of MAOs. Since the underlying motive of earnings manipulation and corporate fraud is broadly similar, one could argue that it is not surprising to find a significant relationship between the former and latter. Critics could also argue that the correlation between managerial integrity and corporate fraud is not an unexpected finding either, irrespective of the empirical proxy of the former that we apply. However, what is interesting from our observation is that, on average, the issuance of a MAO for firms with high earnings manipulation (or low managerial integrity) significantly reduces the subsequent occurrence of corporate fraud identification by regulatory authority. This suggests that auditors in China serve as effective early warning mechanism to expose and discourage managerial opportunism from escalating into corporate fraud. As an increasingly influential emerging economy, the challenges and experiences of China's development have useful implications for other developing countries. The main policy implication of our study is that in countries with similar institutional backgrounds similar to China, it is important to strengthen the quality and independence of the auditing profession in order to realize its full potential and value as an external governance mechanism. Auditors can play a crucial role to improve the credibility of financial statements issued by firms, which in turn reduces the information disadvantage of outside investors. Armed with better financial information, outside investors are more capable of making correct investment decisions to channel their capital to firms with growth opportunities, which in turn benefits the wider economy.