Local Audit System Reform: “Governance Supervision” or “Laissez-faire”? Empirical Evidence from the Reliability of Performance Commitments in the M&A of Local SOEs

Wang Xinxin; Zhang Shumin; Dou Wei

doi:doi:10.16538/j.cnki.jsufe.2023.01.004

Summary

In China, local audit institutions accept the “dual leadership” from local governments and higher-level audit institutions, which makes it difficult to fully and independently implement audit supervision on enterprises under local governments. In order to better play the important role of government audit in the national governance system, the General Office of the CPC Central Committee and the General Office of the State Council issued and implemented the reform of “unified management of people and property of local audit institutions below the provincial level” (hereinafter referred to as “local audit system reform”) at the end of 2015. This paper selects A-share local M&A SOEs in Shanghai and Shenzhen Stock Exchanges from 2012 to 2020 as the research sample, and uses the DID model to empirically test the governance and supervision role of local audit system reform, and the impact on the reliability of performance commitments in the M&A of local SOEs. The results show that: (1) Local audit system reform can significantly improve the governance and supervision role of government audit and improve the reliability level of performance commitments in the M&A of local SOEs. This conclusion is verified in all the M&A samples as well as the samples excluding the potential earnings management behavior within the performance target of 5% and 10%, and remains valid after a variety of robustness tests. This shows that the hard constraints of government administrative supervision to enhance the audit governance role of local audit institutions, especially after the implementation of local audit system reform, is an effective measure to solve the “chaos” in the M&A of local SOEs and “missing commitments” in performance. (2) Further heterogeneity test shows that the stronger the reform measures in the aspects of cadres and personnel, institutional establishment and funds and assets management, the better the supervision effect on the reliability of performance commitments in the M&A of local SOEs. (3) In the analysis of the function channels of improving the supervision effect of local audit system reform, local audit institutions can better deal with the reliability of performance commitments in the M&A of local SOEs by strengthening the disclosure and punishment of violations, but relevant suggestions do not play a significant strengthening role. (4) In terms of the influence mechanism of local audit system reform on the reliability of performance commitments, government audit can promote the improvement of the reliability of performance commitments through penetrating review and supervision, starting from the causes and explicit representations of “missing commitments” in performance, and managing the M&A premium of major assets in M&A and major shareholders’ shareholding reduction. This paper enriches the research on the effect of local audit institutions on the audit governance of SOEs, especially the impact of the implementation of local audit system reform on performance commitments in enterprise M&A, and provides empirical evidence for promoting the reform of the audit management system.