The Choice And Validity Check Of Bank External Auditor

As an important external governance mechanism, external audit is considered to be an effective mechanism to supervise executives and to reduce agency costs. The external auditors can constraint the corporate executives by reviewing the accounting statements and issuing the audit opinions. The effectiveness of the external audit is one of the continuing focus of academia, although most research on general firms confirms this, we have no intuitive understanding about this issue on banking because of the current studies exclude the sample in the banking sector. Due to the understanding of the role of the external audit for improving bank governance is very significant, so we expand external audit to banking industry in order to verify the effectiveness of the external audit.In this paper, we use the sample data of China’s commercial banks from 2006 to 2011, from the perspective of local and non-local auditor to explore the selection factors for external audit of the bank. The results show that the bank’s audit institutions are based on the banks’external environment and themself. Secondly, the paper studies the influence of external auditor on agency costs and bad loans. The results show that these banks who have lower agency costs and lower rate of non-performing loans are audited by non-local external auditors, and the farther away from the local banks, the greater the low degrees are. This paper also verifies the intermediary role of agency costs, that external audit can suppress the non-performing loan ratio of banks by reducing agency costs. In addition to studying the effect of static situation, we continue to examine the dynamic perspective of this issue, and the result still verify the above conclusion that compared to the previous auditors, the changed audit institutions can reduce agency costs and non-performing loan ratio if they are far away from the bank. Of course, this paper is only from the perspective of the local and non-local external auditors to study, although it is difficult to cover an association such as personal relationships, customer resources between banks and the non-local auditors, at least increasing the geographical distance between the two means that the association may be reduced, and therefore the conclusions of this paper has a strong reliability.The conclusion means that, as an important external governance mechanism, the non-local external auditor can weaken the information asymmetry between shareholders and executives and constrain the government’s actions, so as to effectively reduce agency costs of banks and inhibit accumulated bad loans. This not only theoretically demonstrates the effectiveness of the external audit in the bank, but also further provides empirical evidence of the banking supervision. At present, China’s external audit supervision of banks is still in its infancy. According to the analysis of this article, regulators should focus on potential concerns associated with geographic distance and its potential associations. The implementation of non-local auditing of the bank will contribute to improve the robustness of banks at a large extent, so as to maintain stability of the entire financial system.