Research On Audit Failure Under Controlling Shareholder’s Equity Pledge

As the market economy continues to innovate,domestic financing has grown rapidly,and equity pledging by holding companies has long been a common financing tool that has received wider attention and application.Holding companies pledge their shares to banks and non-banking institutions in order to raise finance and obtain liquidity,thereby enhancing the realisation of corporate wealth.However,pledging of shares by major shareholders has two sides to it: on the one hand,it can ease the financing pressure on the company,but on the other hand,it can also lead to financial risks.The higher the share pledge ratio,the higher the financial risk,and if the loan cannot be repaid when due,it may be forced to close out the position,and may even lose control.Transfer of control of the shareholder.Based on this,the controlling shareholder may then join with the management to adopt various surplus manipulation tactics,which in turn may lead to material misstatements in the financial statements of the listed company,which will lead to a significant increase in audit risk for the CPA.In addition,as private enterprises face many challenges in their development process,these challenges may lead them to face financial difficulties and provide the possibility for them to commit financial fraud.At the same time,if the CPA provides an unreasonable audit report,the situation will be dire.Not only could this lead to penalties for the reduced credibility of the accounting firm.Audit failures may also mislead small and medium-sized investors in listed companies to make incorrect assessments of listed companies,which in turn may lead to poor decision-making.It will also increase the information asymmetry between the controlling shareholder and the small and medium investors,which will become the "perfect" time for the major shareholder to "empty" the listed company when facing financing difficulties,bringing great losses to the small and medium investors.In this paper,through the analysis of the audit failure case of Ruihua CPA firm on Sauling shares,in the case of high proportion of controlling shareholders’ equity pledge,according to the motive and means of controlling shareholders’ choice of surplus manipulation and audit failure,the causes of the audit subject,audit object and audit environment are analysed,and the following conclusions are obtained:(1)the controlling East Xiao Xing also began to carry out equity pledge financing since the listing of the enterprise,in just However,the funds obtained from the financing were not used for the normal operation of the enterprise,but were instead appropriated through various means of surplus manipulation,which seriously aggravated the second category of agency problems.(2)Xiao Xing,the controlling shareholder,also appropriated funds by concealing the specific use of the pledge through near disclosure,while misleading the auditors.It also joined with senior management to conceal financial information,and there were bad situations such as falsification of invoices and bank statements to hinder the normal audit process.(3)Ruihua CPA firm was not objective,independent and rigorous when conducting the audit.At the same time,there was no professional training for auditors on the appropriation of funds by related parties,which led to many auditing problems.Finally,the paper proposes targeted measures to prevent audit failures in such situations in the context of the current situation in the domestic market.It is hoped that this paper can provide a new perspective on the audit risk response of listed companies under equity pledges and improve the internal governance structure of the relevant enterprises,as well as provide some reference for audit practice.