Auditor’s Characteristics, The IPO Opportunity For Enterprises And Earnings Management

The Chinese stock market has significant influence on China’s economic development since itsestablishment in1990s, which makes it a far-reaching reform. However, Chinese capital market,especially the qualification for IPO, has been under strict surveillance. China Securities RegulatoryCommission (CSRC) in2003to send the Stock Issuance Examination and Verification Committee(SIEVC) system is reformed, introduces professional intermediary agencies such as the accountingand legal intermediary agencies, hope that through the reform can improve the companyqualification in terms of professionalism and improve the quality of listed companies. As a result,SIEVC entitles auditors the discretion right in cases that it is not completely conforming to allregulations but has no substantial impact on the profit contribution. Generally, an enterprise canconduct the Initial Public Offerings as long as it gets the approval of CSRC following the SIEVC’saudit. Therefore, whether an enterprise can pass SIEVC’s audit becomes the key to acquiring theIPO opportunity. At least3CPAs are required to attend each SIEVC meeting since the9th SIEVCfounded, while5votes is enough to make a case approved, which means auditors from accountingfirms play pivotal role here. So, based on the reputation mechanism, does that mean accountingfirms who own the members of SIEVC could bring more IPO opportunities for enterprises?With the background of governmental regulation, applying the IPO application data inShanghai and Shenzhen over the period from2006to2011, this article analyzes what influencesthat different auditor’s characteristics could have on IPO opportunity, based on which it furtheranalyzes the relevance between auditor’s characteristics and companies’ audit quality. The resultsare as followings: a. under the regulation of security issuance, employing accounting firms owningcurrent or former the members of SIEVC could help enterprises to get more IPO opportunity; b. theearnings management level of accounting firms who own the members of SIEVC is significantlyhigher than other companies’ earnings management level, this behavior is clearly violates thepurpose of the trial system reform and harm the interests of investors.