Financial Statement Insurance System For years, investors in Chinese companies have used the reputations of outside auditors, institutional investors, and global investment banks as a proxy for reliable financial reporting. In fact, the Securities and Exchange Commission led to increasing battles with Deloitte Touche Tohmatsu, which discovered the bookkeeping fraud at Longtop Financial Technologies of China. Deloutte audited the company’s book and stated that Longtop sill recorded $332 million off-balance sheet (S.E.C. clashes with deloitte in China over fraud, 2011). However, this has become worse. Since March, Chinese Government announced that more than two dozen companies said they will resign their auditors because of some accounting problems, according to the U.S. Securities and Exchange Commission. As a result, the SEC charged the overseas companies listed in the United States according to these scandals (Jubak, 2011). Since the financial statements were not disclosed transparently and accurately, even misstated, the independence of auditors in Deloitte Touche Tohmatsu obviously was lost. Nowadays, since the independence of the auditor is lacking, the fraudulent cases, such as financial misstatement, have occurred frequently in China. One major cause is that an inherent conflict of interest is created between the management of clients and the auditor. The auditors are paid by the client companies; they thus depend on CEOs and CFOs, who effectively decide the compensation of auditors. Furthermore, the independence of the auditor is still lacking in regard to several relevant factors. First, the management of client companies plays a predominant role in the auditing. As such, management can use some ways, such as reducing the audit fees, firing the auditors, and not providing the relevant information to threaten the auditors to issue false or biased auditing reports. Therefore, the relationship between management and auditor is relevant, not independent; and the interests of the owner cannot be protected. Second, the lack of effective governmental actions is a significant factor affecting the result of auditing. Specifically, because the Chinese independent auditing market is intervened in by all levels of government, the actions of auditors are controlled and limited. In other words, auditing is just a product that is used by the government to imitate the international convention. Furthermore, many accounting firms even will be asked to "fit" the local governmental actions to obtain some scarce resources. Therefore, the auditing standards should be combined with other policies, such as the Financial Statement Insurance System, to improve the auditing quality and avoid the failure of auditor independence. Indeed, the Financial Statement Insurance System is an effective tool to avoid the lack of auditor independence. Under the Financial Statement Insurance System, the company no longer directly employs the auditors to audit the financial statement, but purchases financial statement insurance that provides coverage to investors when they suffered losses as result of financial misstatement (Ronen, 2002). The listed company decides the insurance rate based on the risk assessment, and a loss resulting from mistakes on the financial statement is compensated for by the insurance company. Thus, the Financial Statement Insurance System promotes improved alignment of incentives and auditing quality (Ronen, 2002). As a result, the Financial Statement Insurance System has several benefits. First, auditors, management, and owners still keep a stable relationship; and the independence of auditing proceeds. Because false financial statements will lead to a lawsuit or high compensatory damages, insurance companies will seek to reveal and disclose the risks of financial statements to avoid the loss (Ronen, 2002). Next, the social cost is decreased by the Financial Statement Insurance System. For the client company, the fierce competition in the insurance market will result in a low level of insurance cost. For the insurance company, the payment of the insurance cost will shrink the future risks of compensation. For the government, the regulatory costs will be reduced because the insurance company shares some regulatory responsibility. Furthermore, the disclosure of information is a signal to measure a company's risks (Moody, 2004). Thus, the insurance company will charge different insurance premiums for different companies based on the assessment of risks and can refuse to provide the service to extremely risky companies. Therefore, the Financial Statement Insurance System, as a new and comprehensive system, has obvious advantages to prevent the dependence of auditors and fraudulent actions. It provides coverage to investors against losses suffered as result of misrepresentation in financial reports to avoid the increasing number of financial fraud cases which result from the failure of auditor independence. As a developing country, China still has a long way to go to develop and improve its auditing market. Thus, the Financial Statement Insurance System combined with the Chinese Auditing Standard is the best way to establish a healthy and consolidated auditing market.

References
Ronen, J. (2002). Post-Enron reform: financial-statement insurance. Stanford Journal of Law, Business & Finance, 8(1). Retrieved from http://w4.stern.nyu.edu/emplibrary/Ronen.Joshua.pdf
S.E.C. clashes with deloitte in China over fraud. (2011, September). The New York Time. Retrieved from http://dealbook.nytimes.com/2011/09/08/s-e-c-clashes-with-deloitte-in-china-over-fraud/
Moody, M.J. (2004, Nov). Financial Statement Insurance: an idea whose time has come. Rough Notes. Retrieved from http://www.roughnotes.com/rnmagazine/2004/november04/11p42.htm
Jubak, J. (2011, June). The big fraud in Chinese stocks (2005, Dec). MoneyShow. Retrieved from http://money.msn.com/investing/the-big-fraud-in-chinese-stocks-jubak.aspx