Research On The Risk Of Share Pledge And Audit Of Controlling Shareholders

In today’s increasingly developed Chinese capital market,equity pledge is an important financing method that is widely used.Equity pledges are widely accepted by publicly traded private companies because they are a relatively simple process with few restrictions and low borrowing rates when compared to traditional financing models,and they can be funded more quickly and smoothly.Equity pledges better meet the realistic needs of both the enterprise and the controlling shareholder,but they also expose the enterprise to some risks.The issue of equity pledges has gradually become a hot topic of social concern in recent years,and the phenomenon of equity pledges in China’s capital market is very serious and growing.By the end of 2021,the total number of pledged shares of A-share listed companies nationwide had reached419,827 million shares,the total proportion of pledges had reached 4.87%,the total market value of pledges had reached 418 million yuan,the total number of pledged companies had reached 2,517,and companies with equity pledges accounted for more than 65% of A-share listed companies in China.As economic development enters a new normal,the phenomenon of equity pledging is becoming more common.Equity pledges account for a sizable portion of the capital market in China,and their prevalence is growing,putting a strain on the company’s operations.Based on the foregoing,the main focus of this paper’s research is: for listed private companies,equity pledges are supposed to contribute to the company’s development;however,the high proportion of equity pledges and frequent defaults of listed private companies in China,what factors cause frequent defaults of the company,and the path that affects audit risk.This article first briefly introduces the research background and significance of this paper,then composes and summarizes the literature related to equity pledges at home and abroad,summarizes and outlines the motives for equity pledges,the impact on enterprises,and the impact on audit risk.Second,after analyzing the relevant concepts,we select Company L as a case study to explain the equity structure of Company L,the pledge of equity,the motivation for the pledge of equity,and the impact on the enterprise,and finally focus on what audit risks auditors may face after the pledge of equity,and the auditor’s options to reduce the risk of material misstatement and business risk,which have positive significance for preventing and resolving the risk of equity pledge.The study’s findings indicate that equity pledges can exacerbate the separation of control and cash flow rights,as well as transform controlling shareholders’ initial good-faith motives into bad-faith motives,influencing the company’s future direction and causing varying degrees of economic consequences.In this case,the initial purpose of Company L’s equity pledge was to raise capital,but at the end of the period,it was transformed into a controlling shareholder seeking his own personal benefit as well as spreading his own risk.As a result,following the equity pledge,the controlling shareholder may use its unique power to transfer risk through the appropriation of funds by related parties and guarantees beyond its own capacity,which effectively affects the risk.As a result,following the equity pledge,the controlling shareholder may use its unique power to transfer risk through the appropriation of funds by related parties and guarantees beyond its own capacity,effectively affecting the company’s future development.Finally,the article examines the risks associated with equity pledges,as well as how auditors can avoid risks during the audit process and improve audit quality.