Legal Supervision of Audit Practice in Corporate Takeovers
Abstract
Auditing services are active throughout corporate takeover process. Audit issues not only affect the nature, efficiency and consequences of takeovers, but also matter the quality and social effects of corporate development after the successful reorganization. This paper aims to enhance the audit quality in the takeover process, and further improve the structure, productivity and social responsibility of takeover parties. Qualitative analysis method and case study are adopted in this paper to investigate the legal issues on audit involved in the takeover process, and explores their fundamental reasons and negative effects on the development of companies and society. This paper finds that since the acquiring companies need to master the comprehensive information of target companies, they incline to choose the audit firms associated with the target companies. Those firms have the opportunity to collude with the target companies and may damage the takeover performance by hiding decision-making power or even falsifying financial data1. In addition, in order to defeat other potential competitors, acquiring companies need to review the financial records and assess the key personnel of target companies within a limited time. They may miss out some technical issues of corporate governance at the stage of pre-takeover due diligence.2 Therefore, this paper suggests that takeover parties adopt shared audit. As the information intermediary, shared audit could effectively eliminate the illegal acts caused by the collusion among auditors and auditees, convey accurate information and promote higher-quality takeovers.
Keywords
Full Text:
PDFReferences
Abdelmoula, L. & Affes, H. 2019. Determining factors of the quality of joint audit: Tunisian context. Accounting and Management Information Systems 18(4): 559-587.
Aggarwal, P. & Garg, S. 2019. Impact of mergers and acquisitions on accounting-based performance of acquiring firms in India. Global Business Review 2019(8): 1-19.
Agrawal, A., Cooper, T., Lian, Q. & Wang, Q. 2013. Common advisers in mergers and acquisitions: Determinants and consequences. Journal of Law and Economics 56(3): 691.
Alcraft, J. 2012. When small print’s not charming. Lawyer 26(49): 11.
Aldhizer, G. & Bechara, M. 2018. Auditing the due diligence process. Corporate Compliance Insights: The Premier Global News Source for Compliance, Ethics, Audit & Risk.
https://www.corporatecomplianceinsights.com/auditing-the-due-diligence-process/ [2 February 2022]
Alhenawi, Y. & Stilwell, M. 2017. Value creation and the probability of success in merger and acquisition transactions. Review of Quantitative Finance and Accounting 49(4): 1041-1085.
Anandarajan, A., Kleinman, G. & Palmon, D. 2008. Auditor independence revisited: The effects of SOX on auditor independence. International Journal of Disclosure and Governance 5(2): 112-125.
Armstrong, C. S., Jagolinzer, A. D. & Larcker, F. D. 2010. Chief Executive Officer Equity Incentives and Accounting Irregularities. Journal of Accounting Research 48(2): 225–271.
Burns, J. & Scapens, R. W. 2000. Conceptualizing management accounting change: An institutional framework. Management Accounting Research 11(1): 3-25.
Cai, Y., Kim, Y., Park, J. C. & White, H. D. 2016. Common auditors in M&A transactions. Journal of Accounting & Economics 61(1): 77.
Caiazza, R. & Volpe, T. 2015. M&A process: A literature review and research agenda. Process Management Journal 21(1): 205-220.
Campa, D. & Donnelly, R. 2016. Non-audit services provided to audit clients, independence of mind and independence in appearance: Latest evidence from large UK listed companies. Accounting and Business Research 46(4): 422.
Chen, S., Ma, H. & Chen, X. 2016. Competitive pressure, characteristics of competitors and audit pricing of accounting firm. Journal of Audit & Economics 31(5): 11-29.
Cheng, W., Zhang, Y. & Xie, Y. 2019. Administrative penalty of China Securities Regulatory Commission, audit market competition pressure and audit quality. Finance and Accounting Monthly 22: 96-104.
Chircop, J., Johan, S. & Tarsalewska, M. 2018. Common auditors and cross-country M&A transactions. Journal of International Financial Markets, Institutions & Money 54: 43–58.
Chiriac, I. 2011. Mergers-success or failure? CES Working Papers 3(1): 135-142.
Cholle, F. P. 2011. Intuitive compass: Why the best decisions balance reason and instinct. San Francisco, CA: Jossey-Bass.
Dhaliwal, D. S., Lamoreaux, P. T., Litov, L. P. & Neyland, J. B. 2016. Shared auditors in mergers and acquisitions. Journal of Accounting and Economics 61(1): 49–76.
Dounis, N. 2007. The internal audit role during mergers & acquisitions: The European Union experience. Unpublished Doctoral thesis, City University London.
https://openaccess.city.ac.uk/id/eprint/8499/ [5 October 2021]
Elsbach, K. D., Stigliani, I. & Stroud, A. 2012. The building of employee distrust: A case study of Hewlett- Packard from 1995 to 2010. Organizational Dynamics 41(3): 254–263.
Fraser, D. R. & Zhang, H. 2009. Mergers and long-term corporate performance: Evidence from cross-border bank acquisitions. Journal of Money, Credit, and Banking 41(7): 1503.
Granlund, M. 2003. Management accounting system integration in corporate mergers: A case study. Accounting, Auditing & Accountability Journal 16(2): 208-243.
Gupta, R. & Paswan, A. K. 2016. Audit quality, auditor's independence and other parties. AAYAM: AKGIM Journal of Management 6(2): 16-26.
Han, D. 2011. The influence of corporate governance structure on merger and acquisition risk control of listed companies. Shandong Social Sciences 193(9): 133 & 148-150.
Hao, L. & Ma, K. 2017. Cross-border audit supervision, economic security and audit firm internationalization strategy. Accounting Forum 16(2): 146-156.
Hartgraves, A. 2004. Andersen's role in Enron’s failure. Die Betriebswirtschaft 64(6): 753-771.
Hund, J., Monk, D. & Tice, S. 2010. Uncertainty about average profitability and the diversification discount. Journal of Financial Economics 96(3): 463.
Iyer, V. M., Bamber, E. M. & Barefield, R. M. 1997. Identification of accounting firm alumni with their former firm: Antecedents and outcomes. Accounting, Organizations and Society 22(3): 315-336.
Jiang, Y. & Xu, Z. 2015. Discussion on the involvement of internal auditing staff in enterprise M&A. Journal of Huaihai Institute of Technology (Humanities & Social Sciences Edition) 13(12): 91-93.
Kanaracus, C. 2012. HP's woes persist with deal gone bad. Computerworld 46(22): 10.
Lei, M. & Wang, C. 2005. Audit risk analysis on the merger and acquisition of listed companies. Audit Monthly 199(11): 43-44.
Lennox, C. S. & Park, C. W. 2007. Audit firm appointments, audit firm alumni, and audit committee independence. Contemporary Accounting Research 24(1): 7.
Li, B. & Pan, A. 2016. How to recruit the matching accounting firm in the merger & acquisition: Empirical evidence from Chinese listed companies. Journal of Audit & Economics 1: 46-54.
Li, L. & Yao, H. 2019. Can shared auditors inhibit M&A goodwill bubbles? The evidence from Chinese listed companies. Journal of Audit & Economics 5: 32-42.
Li, M. & Ren, J. 2017. Symbolic punishment? A study on the relationship among regulatory punishment, audit opinions and audit fees. Journal of Accounting and Economics 1: 84-101.
Li, Z. 2020. A brief discussion on accounting problems from the perspective of corporate merger and acquisition. Marketing Management Review 2: 54-55.
Liu, Q. & Wang, H. 2020. Research on the effect of shared audit of supply chain enterprises on financial violation–Evidence based on A-share listed companies. Journal of Social Science of Harbin Normal University 58(3): 51-57.
Liu, Q. & Wang, H. 2021. Study on the impact of shared audit on corporate governance efficiency–Based on the empirical evidence of A-share manufacturing enterprises. Journal of Chongqing University of Technology (Social Science) 35(2): 93-102.
Liu, X. & Li, M. 2013. Can disciplinary sanctions improve audit quality: The empirical research based on penalty cases by China Securities Regulatory Commission between 2008 and 2010? Securities Market Herald 6: 27-32.
Liu, Y. & Shen, X. 2020. Merger risk and internal control of Ruihua Accounting Firm. Corporate Finance 11: 57-59.
Lu, S. 2020. An analysis of common legal issues in asset acquisition. Simmons Law Firm.
https://www.sohu.com/a/440658272_270543 [5 October 2021]
Luo, W. 2017. Problems and countermeasures in the scale development of China's accounting firms–Taking Ruihua accounting firm as an example. Enterprise Reform and Management 11: 50-58.
Ma, J. 2014. Don't expect the Certificate Public Accountant to find financial fraud. Directors & Boards 4: 29.
Ma, X. 2018. Discussion on the quality control of accounting firm in reference to the penalty of Ruihua accounting firm. Accounting Learning 10: 100.
Merrett, D. T. & Houghton, K. A. 1999. Takeovers and corporate governance: Whose interests do directors serve? Abacus 35(2): 223-240.
Shapiro, D. 2013. The HPQ/AU scandal: What went wrong? The Journal of Corporate Accounting & Finance 24(4): 49-53.
Tang, B., Xia, K. & Lian, H. 2015. An analysis of asset valuation premium in merger and reorganization of listed companies—From the perspective of corporate management and independent audit. Price, Theory & Practice 375(9): 76-78.
Wang, B., Li, J., Su, W. & Tang, Y. 2011. Can administrative punishment improve audit quality?—Based on the evidence of CSRC punishment. Accounting Research 12: 86-92.
Xia, L. 2014. Judicial reform and the development of stock market: May Chinese stock market function well in a weak legal environment? Journal of Accounting and Economics 28(5): 3-9.
Yang, Q., Yao, J. & Zhang, J. 2015. Can sharing a common auditor reduce financial restatements of firms?—Evidence from Chinese listed companies. Accounting Research 6: 72-79.
Yao, H. & Li, L. 2018. Can shared audit improve M&A performance?—Evidence from Chinese A-share listed companies. Journal of Audit & Economics 3: 29-39.
Zerni, M., Haapamaki, E., Jarvinen, T. & Niemi, L. 2012. Do joint audits improve audit quality? Evidence from voluntary joint audits. European Accounting Review 21(4): 731-765.
Zhang, D. 2020. A study on the risk control of corporate merger and acquisition by audit firms. Business Information 27: 169-170.
Zhang, J. & Ebbers, H. 2010. Why half of China’s overseas acquisitions could not be completed. Journal of Current Chinese Affairs 39(2): 101-131.
Zhu, S. & Ke, X. 2018. The effectiveness of audit industry supervision: Empirical evidence based on firm strategy choice after CSRC administrative punishment. Journal of Finance and Economics 44(3): 56-67.
Refbacks
- There are currently no refbacks.