Listed companies and audit agencies Game Analysis of the process of information disclosure

Abstract: This article based on game theory, auditors of listed companies and game analysis of the process of information disclosure, through the establishment of game model, in-depth analysis of information disclosure of listed companies in the two main constraints of certain environmental conditions, to allow selection from their behavioral strategies to choose and implement the process.

This example also to Joan empirical analysis of public sources, and increase the cost of fraud, to strengthen the regulation proposed countermeasures. In the information disclosure of listed companies, the subject is a listed company and the two auditors. Since each rational economic entity, its motives and objectives are to maximize their expected utility. No matter the source of China's Hainan China, Guangxia, or the United States, Enron (Enron), WorldCom (WorldCom), etc., resulting in the root causes of false accounting information is that this behavior can meet the actors (listed companies and audit agencies) one needs two parties, can bring its expected economic benefits. We call this part of the economic interests of false information "Rent." Listed companies will benefit from the provision of false information, but can not monopolize this part of the "rent." This is due to both the audit organization or its default behavior of the fraud conspiracy to fraud, there is a commitment to honesty and practicing to outside the risk, such additional risk making the audit of listed companies will inevitably require additional to the "return", so there listed companies and audit agencies to split false accounting information of the "rent" the issue between the two subjects will have a kinds of conflict of interest and confrontation, resulting in game. This article based on Game Theory (Game Theory) analysis of accounting information of the two main constraints in certain environmental conditions, from their choice of behavior strategy allows to choose and implement the process, further explore effective governance program.

Model 1 game
1 • 1 assumptions 1) assumes both listed companies and audit agencies rational economic man, and the type of risk preferences are non-.2) a listed company as a whole, that a listed company's management and shareholders interests exactly .3) between listed companies and auditors have full information, that is, for listed companies, accounting fraud, auditors are fully capable of checking out, there is no capacity, lack of knowledge and experience .4) only when the listed companies disclosed the existence of false financial When attempting to report, the audit agency is possible default of its fraud, or in connection with conspiracy to commit fraud. immediately outside of listed companies prepared to provide honest accounting information, the auditor will not be offered to false .5) Let W bound for the outside world, is the regulatory efforts of the fraud investigation, including the probability of discovery and the punishment .6) Let A, B, representing public companies and auditors .7) Let ��G provide false accounting information for the additional income, that is, false accounting information of the "rent" .8) Let ��Gm as auditors of listed companies to pay rent of false information, that the additional revenue auditors .9) Let W dishonest enterprise of providing false accounting information, and auditors honest practice, the firm to the audit agency's "punishment" (such as dismissal of auditors) the negative effect brought about .10) Let P is the probability of fraud was found, and 0 �� P �� 1.11) that when set �� fraud was discovered, the relevant regulatory authorities to give listed companies the punishment .12) Let F means that when fraud is found, the relevant regulatory authorities of the audit institutions of punishment. the model, A listed company said, B said that the audit agency. the payment of the endpoint vector, the first number in parentheses additional revenue for public companies, the second number is the additional revenue audit institution. listed companies have two strategic choices, namely, (honest) and (dishonest), The audit agency's strategic choice, there are three, namely, (honesty, honesty), (dishonest, honest), (dishonest, dishonest).

1 • 2 model to discuss the game tree, there are three equilibrium strategy combination: (honesty, honesty), (dishonest, honest), and (dishonest, dishonest) .1) listed company providing false accounting information, depending on ability to obtain additional revenue, that is, (��G-��Gm) (1-P)-IP> 0, they will have the urge to fraud. and the enterprise division of information to allow auditors rent as: ��Gm <��G-IP1-P ( 1) Order: ��G * ml = ��G-IP1-P, then the value of listed companies can give the upper limit of the benefits of audit institutions; when ��Gm> = ��G * ml, the listed company will not choose to fraud, because that would not benefit can Fig. 2) for the audit institution, to assist listed companies to help fraud fraud is a prerequisite in addition to a return to practice honesty, that is: ��Gm (1-P)-FP>-W. At this point, requiring The information rent is split: ��Gm> FP-W1-P (2) that ��G * m2 = FP-W1-P, shall be required when the listed company or its auditors default fraud conspiracy, the listed companies to return to the audit agency minimum limits. less than this value, the audit agency will choose to practice honesty, refusing fraud. Therefore, when ��G * m1> ��G * m2, as long as the audit of listed companies can give more than the maximum value of the interest of a required audit agency The minimum value of interest, the game's best strategic combination of (dishonest, dishonest), this time, there are auditors of listed companies with the possibility of fraud conspiracy. In other words: ��G * m1-��G * m2 = ��G-IP1 -P-FP-W1-P = ��G-(1 + F) P-W1-P (3)
When (3) value is greater than 0, providing false accounting information would have the power. This difference is greater, conspiracy to commit false information, the stronger will power; the difference is 0, the two sides had no false information Disclosure of power, which (honestly, honestly) then the best strategic choice for the .1 • 3 models and policy implications for the formula (3) obtained, ��G accounting information that is false, "rent" the value of the same cases, take the following measures increase (3) The second value, to reduce the ��G * m1-��G * m2 the poor, thereby reducing the occurrence of acts of accounting fraud: first, to increase the provision of false accounting information of listed companies of punishment, which increases (3) in the �� value; second, increase the false audit reports issued by the audit institutions of punishment, that is increased (3), F value; third, to increase the quality of inspection efforts accounting reports, which increased large probability of false information is found, the performance (3) the P value, increasing IP value while increasing; Fourth, reduce (3) W values, the second larger. W value when the listed company accounting fraud and the desire to uphold the honesty and practicing auditors, the auditors of listed companies to give the "punishment" (such as dismissal, etc.) to bring a negative effect. reduce the W value means that the audit of listed companies decreased control over body to enhance the independence of audit institutions. from our current situation, the actual audit of listed companies is the principal managers of listed companies, which employ their own auditors management "supervision" of his behavior, the listed companies due to hold appointment of auditors, audit costs for hiring and standards such as power, the audit staff of the "god", obviously in a position of active control, the audit agency was in a passive position. audit institutions in the same under the pressure of competition for listed companies to make concessions, by default, to accommodate listed companies, listed companies and even activities of conspiracy to commit accounting fraud to become possible.

2 model test case because Joan has been a source of "ending" and Guangxia, Enron (Enron), WorldCom (WorldCom) and other events are being processed, hence, this source as an example to Joan tested the above Game:
2 • 1 Joan source event outline April 30, 1993, Joan source in the Shenzhen Stock Exchange (0508) In 1994 the net assets was only 0 • 03%, 1995 EPS was less than 1 per cent, is A veritable junk stocks .1995 Annual Report was published (April 30, 1996) price of 3 • 65 million. to January 22, 1997, Joan Annual Report 1996 released the source rate, saying earnings per share 0 • 867 yuan, an increase of 962 • 33%, 1996 annual profit of 5 • 7 billion, an increase of 1290 • 68-fold increase in capital reserve 6 • 5 million. Meanwhile, the stock price from April 1996 30 3 • 65 Ԫ Biaosheng Zhi January 22, 1997 in the 26 • 18 element [1]. verified by the regulatory authorities: Joan China Annual Report 1996 is the source of the company's senior management and audit institutions of conspiracy to false accounting firms in Hainan China out of a total of inflated profits 5 • 4 billion in inflated capital fund 6 • 57 billion. the controlling shareholder of Hainan companies use the public source of good news for the company fabricates, together with the Shenzhen Nonferrous finance companies illegally manipulated the stock of the Company, China source of illegal profits the company 65.51 million yuan in Hainan, Shenzhen and non-ferrous metals profit 66.3 million yuan of illegal financial companies, China Securities Regulatory Commission staff have been involved in this incident be punished: the company's former chairman MA Yu and sentenced to a period of only 3-year sentence former chief accountant of the text introduce classes for 2 years in prison, suspended for two years of implementation; the source of the people of Hainan and Shenzhen Nonferrous finance company a warning, confiscate its illegal gains and 66.51 million yuan and 66.3 million yuan, were fined 200 million; on the issue unqualified audit opinion on the accounting firm of Hainan China a warning, suspension of their securities business qualification for 6 months, suspension of qualifications for signing the Securities CPA for 3 years. reposted elsewhere in the Research Papers Download http://www.hi138.com 2 • 2 in model checking model checking is required before that, due to the media and the public official disclosure of the source event Joan limited information necessary to make assumptions as follows: (1) The years 1995 -1997 audit agency no details of specific revenue figures The report, therefore, made after consultation with industry veteran assumptions are as follows: If the auditors honest practice, the normal yield of about 15 million, if the auditor fraud conspiracy and listed companies, the proceeds of about 20 million. This means that auditors of listed companies the information given to rent ��Gm = 5 million. (2) If listed companies have fraud auditors adhere to the honest intent and practice, listed companies will be the second year of the dismissal of the auditors, which means The auditors of listed companies will never lose this client, the audit agency will be a loss of perpetuity, let the market interest rate is 2%, was due to give auditors of listed companies leaving the sanctions suffered the loss of audit institutions: W = 15 �� 2% = 750 (million) accounting fraud was discovered on the probability of P. can be used for the following hypothesis: more than 1,100 of the existing listed companies, in the past years, a cumulative assessment of external assets available, prospectuses, listing Notice, the investment value analysis report, annual reports, mid-year report, quarterly reports and other accounting information about 2 million copies. according to Xinhua, the National Audit Office in 2001 organized the financial statements of listed companies spot checks found that the total sample of 32 annual reports of listed companies, 23 were severely distorted, resulting in a false amount of financial accounting information 71 • 43 ��Ԫ [2]. this ratio, the probability of fraud listed company P = 23 �� 32 �� 100% = 71 • 9% . the end of 2001, China has dealt with the case of 37 cases of false accounting information. which prior to 1997 and only 5 cases, 8 cases in 1998, 1999, 8 cases, 10 cases in 2000, 2001, 8 cases [3]. It The above information, infer the probability of the current fraud was found P = 37 �� (20000 �� 71 • 9%) = 0 • 26% means that the probability of undetected fraud is :1-P = 1-0 • 26% = 99 • 74% In addition, Joan source of information for accounting fraud hire ��G calculated as: ��G = + listed companies additional revenue additional revenue where auditors of listed companies additional revenue = (price �� shares outstanding added value ) + source of illegal profits calculated Joan false accounting information false accounting information in the case of rent is: ��G = (26 • 18 yuan / share -3 • 65 yuan / share) �� 18742 • 35 million + shares +6651 50000 = 428921 • 14 ��Ԫ visible, false if successful, Joan source companies and accounting firms in Hainan China is a huge additional revenue, that is nearly 43 billion yuan. Joan source accounting fraud was discovered, the regulatory departments penalty of 200 million. set upon by a criminal penalty, the named Ma and classes will not be in a similar position as the original, the annual salary was originally 50,000 and 30,000, the loss is also a pension, still located in market interest rates of 2%, they are subject to the present value of the loss of penalty = (50000 +3 million) �� (P / A, 2%, 20) = 8 �� 16 • 3514 = 130 • 81 (million) is calculated �� (known for its fine of 200 million): �� = 200 ��Ԫ +130 • 81 ��Ԫ = 330 • 81 ��Ԫ based on the audit regulatory bodies - the Chinese accounting firms in Hainan penalty for F: F = the accounting firm signed up for the punishment + If the punishment of Accountants Certified Public Accountants of Hainan had a year of Chinese listed companies to undertake the audit of 10 pen, 10 pen and let the business is only mid-year report and annual audit, and honest business practice revenue each are 15 million. and let each business receipts in the CPA firm and the distribution ratio of about 7:3 between that which 150,000 yuan accounting firms audit fee income was 10 • 5 million in personal income for the CPA 4 • 5 million. Let each of the accountant of a listed company can only audit services, according to the former we can see its annual revenue of 9 million, and set its non-listed company's business income earned year to 4 million in the making is found leave before signing up for the 13 million annual income of Certified Public Accountants. As punishment to the regulatory authorities to bring the loss of Hainan China Certified Public Accountants (still set the interest rate 2%): F = (15 �� 10 �� 0 • 7) �� 12 �� 6 +13 �� (P / A, 2%, 3) = 52 • 5 +13 �� 2 • 9410 = 90 • 73 (million) model ��G * m1-��G * m2 value as: ��G * m1 -��G * m2 = ��G-(1 + F) P-W1-P = 428921 • 14 - [(330 • 81 +90 • 73) �� 0 • 26% -750] �� (1-0 • 26%) = 429671 • 99 (million) (this value is far greater than 0) shows that under the existing environmental constraints, in order to prevent counterfeiting in the information disclosure is very difficult. In other words, corporate governance, regulatory policies In terms of reducing fraud is invalid (need to be revised). This is the source of the people following after Joan Guangxia, MACAT so, the United States following the Enron, WorldCom, the accounting frauds are still endless reasons.

This proposal: increase the behavior of the Public Company Accounting fraud penalties, publication of false news for the use of illegally obtained income equivalent to impose a fine of 3 times the illegal earnings; the company private and economic losses caused to the shareholders , civil compensation system should be introduced; increase penalties auditor fraud conspiracy, a false disclosure is found, it will revoke the signature firm of certified public accountants and securities business qualification; auditors for the illegal earnings should be fine 10 times; increase the disclosure of accounting information and inspection, which found that disclosure of information to increase the probability of fraud. as in the example that if P increased to 75%, the above model results will be different from the above data into the ��G * m1-��G * m2 formula: ��G * m1-��G * m2 = 428921 • 14 - [(137729 • 8 +5741 • 15) �� 75% -0] �� (1-75%) =- 1491 • 71 ��Ԫ <03
Conclusion discussed above, if the false success, additional revenue of listed companies should also include other non-monetary benefits, such as market expansion, false brand, goodwill, and possibly more than other companies to borrow more costly than the low to write papers loans. However, these factors difficult to quantify, this is not considered. Also, if false failures, listed companies and audit agencies there will be a loss that can not be monetized, such as the responsible person may be criminal or administrative penalties.

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