Executive Incentive And Demand Of External Audit

Executive incentives and external audit are two important corporate governance mechanisms of modem enterprises.There are not only incentive effects,but also agency conflict increasing effects in the conclusion and implementation of executive incentive contracts because of inherent defect of incomplete contracts.As an external monitoring and security mechanism,high-quality audit can ease agent conflict,and therefore study about the connection of executive incentive contracts and demand of extemal audit is significant to perfecting executive incentive mechanisms of listed companies of China,to improving audit role in the security market,and to promoting listed companies' sustained development.First,using incomplete contract theory and system equilibrium theory,this thesis analyses the nature and connection of these two contracts in normative research method. Based on the classic motivation theory,incentive contracts are incomplete,which catablizes them,and a series of agency conflicts will be produced in the conclusion and implementation of executive incentive contracts.Incentive contracts and audit contract belong to different economic game domains,and are complementary systems.Second,this thesis tests the connection of executive incentive compensation contracts and demand of external audit by drawing samples of China's security market from 2002 to 2005.The main conclusions are as follows:1.Executive incentives in listed companies of China have agent conflict increasing effect.Companies that have higher executive incentives have more demands for high-quality audit,high-quality audit can alleviate the agent conflict and improve corporation values.2.Executive incentives may induce earnings management,which is influenced by executive power. Auditors give attention to earnings management and can issue right audit opinions. Probability of giving modified reports to earnings management measured by discretionary accruals decreases significantly.As a whole,earnings management induced by executive incentives can communicate information about future firm profitability.3.Whatever from auditor change or abnormal audit fee perspective,study finds that there are motives of shopping audit opinion for higher incentive compensation. Motive of shopping audit opinion by abnormal audit fee is significant while not by changing auditors,but both of shopping audit opinion are unsuccessful.In the Appendix,this thesis conducts a preliminary empirical test about if high-quality audit can improve procedural fairness of executive incentives,and finds no evidences.Based on the result of above study,this thesis proposes some policy recommendations.It is important to strengthen the audit of listed companies' executives compensation for perfecting the supervision and restraint mechanisms of executive incentives.So it is necessary to consummate the independence and fairness rules of executive incentive compensation conclusion and improve the transparency of executive incentive compensation.Of course,it is important steps to enact auditing standards and guidance,and to further improve credibility mechanisms of the audit market,industry self-regulation and other regulations.