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5. Conclusion
Currently most affiliated business groups are still engaged with different audit firms
for various components, which causes difficulty for the group’s auditors to inhibit
improperly related party transactions. Wholly speaking, affiliated business groups in
Taiwan are able to utilize related party transactions to manipulate earnings. Despite the
release of Statement No. 54 of Auditing Standard: Special Consideration with Regards to
the Audit of Group Financial Statements, which clearly requires that the group’s auditor
in-charge be informed of every component in the group as well as to be fully responsible
for the group’s financial statements, this statement does not require that all components of
the group should hire the same audit firm. The empirical results of this study indicate that
when every component in a group hires the same audit firm, the possibility of the group
utilizing improper related party transactions to manipulate financial earnings will be
lowered.
In addition, consolidated financial statements should be prepared beginning in 2013
in Taiwan, which may reduce incentives for groups to manipulate earnings through
abnormally related party transactions. If auditors of the group would like to accurately
audit consolidated financial statements, they must determine whether the investing
company has controlling power over the invested company. Based on the No. 27 of the
International Accounting Standards related to the requirement of consolidated financial
statements, if the components of the group are audited by the same audit firm, auditors can
correctly decide where there is controlling power among the components and the accuracy
of financial reporting of the group can be enhanced. Therefore, based on the results of this
study, authorities should consider requiring a business group to engage with the same
audit firm and encourage them to engage with big audit firms. By doing so, the audit
quality of the group may be enhanced.