Study On The Governance Effect Of External Audit On Charitable Foundations

With developing economy and awakening charitable awareness, more and more charitable foundations emerge in China, which largely alleviates governmental pressure and promotes social harmony. Now, China is experiencing highly complex transition, providing rare opportunities for social medium organizations. Especially, the WenChuan earthquake provoked numerous charitable foundations’establishment.The development of charity depends largely on volunteerism. Hence, the financial sourcing of charities is uncertain and sensitive. Sadly, a series of scandals about charity, such as the "Guo Meimei incident", deeply hurt people’s enthusiasm towards charity. For better regulation of charitable foundations and information transparency, relevant government departments have always paid great efforts to issue strict regulation specifications. In2011, the Ministry of Finance and the Ministry of Civil Affairs jointly issued relevant notice, which clearly introduced CPA audit into charity regulation. As an important external governance mechanism, CPA audit is catching more and more attention. Can external audit really exert governance effect on charitable foundations? This needs urgent empirical evidence.On one hand, theory study about NPO is quite rich, which provides directional guidance for empirical study. However, domestic empirical research about charitable foundations is not that rich, which provides inspiration for this paper. On the other hand, regulation about charitable foundations is relatively strict, which leads to high information disclosure level. Also, for more social recognition and sustainable development, more and more charitable foundations have made efforts on information disclosure. Relative information disclosure platforms, such as China Foundation Center and China Foundation Network have been set up. These all make empirical research about charitable foundations possible.Choosing the TOP100charitable foundations from China Foundation Center, this paper combines normative research with empirical research. The purpose is to study weather external audit can lay governance effect on charitable foundations.The paper will be arranged as follows.In the first part, research background, research purpose and meaning, research method and expected innovations are introduced.The second part is literature review. This part reviews related research both at home and abroad. In reference to mature corporate governance research, various views about external audit and charity foundations’governance are reviewed.The third part is theoretical analysis, which provides theoretical basis for empirical research. Firstly, this part introduces the connotation of charitable foundations’governance, including organization structure and governance mechanism. Then, the paper gives detailed analysis about principal-agent theory, audit "immune system" theory and synergy governance theory, which forms framework of theoretical analysis. The principal-agent theory provides display platform for external audit. The audit "immune system" theory makes clear functions of external audit. The synergy governance theory clarifies the mechanism of the external audit’s governance effect on charitable foundations.The fourth part is research design. Firstly, the paper puts forward research hypothesis. Then, related variables, data source and research model are presented.The fifth part gives empirical results and detailed analysis. On the basis of Excel processing, the paper uses the tool of stata to regress samples. This part also lists the result of robustness inspection.The last part draws research conclusions and proposes related recommendations. Shortage of the research, possible innovation points and further research prospect are also pointed out.Through empirical test, this article draws the following conclusions. Firstly, the top100accounting firms can provide high quality audit, which can play an effective role in charitable foundations’management. When choosing the top100accounting firms, the donation income and total revenues of charitable foundation will increase significantly, and the management fees will be significantly reduced. It shows that the top100accounting firms will increase financial performance and reduce the agent cost of charitable foundations. Secondly, compared with top100, the top50accounting firms share higher reputation and higher audit quality. The top50accounting firms play a more effective role in charitable foundations’ management, shown by more significantly improved financial performance and reduced agent cost. To test the robustness of the regression, the paper also analyses regression on national charitable foundations. The regression result also supports the above conclusions.The paper has invocation points. Firstly, based on principal-agent theory, audit "immune system" theory and synergy governance theory, the paper builds the theory framework of external audit’s role and analyzes the mechanism, enriching the theoretical research of charitable foundations. Secondly, this paper gives empirical verification of external audit’s role in charitable foundations governance, enriching empirical research in this area.Considering existing research and insufficiency of the paper, future research should be developed in the following aspects. At present, most certified accountants issue standard opinion on charitable foundations. In the future, external audit of charitable foundations will be gradually improved, which makes research of audit opinion’s governance effect be possible. As to theory analysis about external audit’s governance effect on charitable foundations, more angles need further thinking.