Controlling Ownership, Counterbalance, and the Effectiveness of External Audit of China’s Listed Companies

• In Event: Auditing: International Evidence II

Abstract

This paper investigates the influence of corporate governance and counterbalance behaviors of controlling shareholders and other blockholders on audit opinions and the effectiveness of external audit, from the perspectives of agency problem and ultimate control rights. Our empirical analyses indicate that: (1) controlling shareholders decrease the audit quality, while other blockholders do not have significant influences on the quality of financial statements, but they are inclined to enhance the audit quality. (2) The control rights and cash flow rights of controlling shareholders are negatively associated with the frequency of receiving modified audit opinions and the deterioration of audit opinions. However，controlling shareholders with greater control rights and involvement in listed companies may engage in audit opinion shopping and reduce the audit quality as well as the effectiveness of external audit. (3) The shareholding percentage and the degree of counterbalance of other blockholders are positively associated with the likelihood of receiving modified audit opinions and the deterioration of audit opinions. This result indicates that other blockholders of China’s listed companies depend on external governance mechanisms to counterbalance controlling shareholders and to enhance the audit quality as well as the effectiveness of external audit.

Authors

• Chao Chen, Fudan University

• Rongyi Li, China Securities Regulatory Commission

• Yuejun Tang, Fudan University

• Jingjing Zuo, University of Shanghai for Science and Technology