Study on Financial Reporting Quality Which is Affected by Subordinate Modes of Internal Audit in IPO Companies

Abstract

This paper studies the relations between subordinate modes of internal audit and financial statement quality on the data basis of IPO companies in Shenzhen Stock Exchange from 2007 to 2009. We find that: (1) Those companies who set up internal audit department separately have higher financial statement quality than those who don’t; (2) The higher level of internal audit has, the better quality in financial reporting will be, so does the disclosure transparency of this report. Thus, public companies build internal audit branch with a right orientation is helpful to form high-efficient and transparent information transmission mechanics, offer honest and reliable information to investors making them choose rightly. At the same time, the conclusion provides evidence for the action that CSRC (China Securities Regulatory Commission) publishes laws aiming at ordering companies to set up internal audit department.