Research on the Effectiveness of Financial Supervision of the
Supervisory Board
Wang Lu
Sichuan University, No.24 South Section 1, Yihuan Rode, Chengdu 610064, China
Keywords: The Members of Supervisors Board, Financial Supervision, Corporate Governance.
Abstract: To strengthen system innovation and capacity building of the Supervisory Board, and to promote the
modernization of corporate governance, based on the samples of listed companies from 2007 to 2012 in china,
through the establishment of the modified Jones model to calculate discretionary accruals and adopted its
absolute value as a substitution variable for earnings management, this paper studied the problem of financial
supervision effectiveness of the Board of Supervisors. The results show that the age and degree of supervisors
are negative related to the company's earnings management while the banking background has a positive
correlation. The research did not find their sex or financial background has a significant influence on the
earnings management of listed companies. The conclusions show the professionalism of supervisors is limited
to exert, but the Supervisory Board still plays an irreplaceable role in corporate governance.
1 INTRODUCTION
In the modern corporate system, ownership and
management are separated. In order to solve the
interest conflict which might exists between the
owners and its managers, the new “Company Law”
article 54 provides that the Board of Supervisors the
right to inspect the company's financial situation. The
provision reflects that the financial supervision is an
important aspect of the Board of Supervisors to
represent the interests of shareholders to exercise
supervision functions. In reality, due to the Board of
Supervisors is not involved in day-to-day operation
and management, irregularities often be found after
the damages have happened to the company.
Therefore, in order to strengthen the function of the
Board of Supervisors, the new “Company Law”
article 55 stipulates that supervisors may attend board
meetings, and raise questions or suggestions on
resolutions or matters of the Board of Directors. As a
monitoring mechanism set up within company, the
responsibility fulfillment situation of the Board of
Supervisors is directly related to the stakeholders in
the protection of their interests, good condition of the
Board of Supervisors can help company to make the
right decisions, to maximize the shareholders' equity.
Then, how about the actual performance effect of
the legal power of the Board of Supervisors? This
article introduced the empirical data of listed
companies in our country, made an empirical study
between characteristics of the Supervisory Board
members and company's earnings management level
to provide some advices to the listed companies in
corporate governance.
2 RELATED LITERATURE
At present, a lot of studies suggest that the Board of
Supervisors has become a formality in China and its
supervision function is weakening. Jia et al., (2009)
studied the function of the Board of Supervisors when
listed companies were facing legal proceedings,
found it did not play a positive role which it should
play in corporate governance. Hu et al., (2010) argued
that, because of the influence of ownership
concentration, the Board of Supervisors had brought
negative impact to the operating performance of listed
companies. Sun Jingshui, Sun Jinxiu (2005) found
that the Board of Supervisors had no significant effect
on company’s performance through the empirical
analysis, and they had a conclusion that it did not
work as a role of supervision. Liu Shanmin (2008)
selected the negative independent opinion published
by the Board of Supervisors as a substitution
variables, found that the function of the Board of
Supervisors is very weak. Li Lijun, Jin Yuna (2010)
selected the size of the Board of Supervisors as the
422
422
Lu W.
Research on the Effectiveness of Financial Supervision of the Supervisory Board.
DOI: 10.5220/0006027704220426
In Proceedings of the Information Science and Management Engineering III (ISME 2015), pages 422-426
ISBN: 978-989-758-163-2
Copyright
c
 2015 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

core, found that supervisory board’s constraints on
the manager's over-investment behavior is not fully
realized. Hu Haichuan, Zhang Xinling (2013) tested
the relationship between supervisory board
characteristics and the quality of information
disclosure of listed company, found that the Board of
Supervisors is negligible to improve the quality of
information disclosure.
However, there are also some studies suggest that
the Supervisory Board continues to play an
irreplaceable role in corporate governance. Firth et
al., (2007) found that the size of the Supervisory
Board, the Board of Supervisors meeting times is
positive related to earnings information content. Li
Weian, Hao Chen (2006) evaluated the situation of
Supervisory Board governance from the
characteristic of the Supervisory Board, the
evaluation results showed that supervisors lack
competence is the cause of the low level of
Supervisory Board Governance, but still come to the
Supervisory Board as the statutory corporate
oversight institutions play an irreplaceable role in
supervising. Wang Shuhui, Tong Ning (2009) [9]
study showed that in addition to the size of the Board
of Supervisors had no significant effect on
performance, the annual number of meetings of the
Board of Supervisors, the ratio of external
supervisors, Board of Supervisors shareholding
proportion and Supervisors shareholding proportion
was significantly positively correlated with company
performance, and indicated since the new “Company
Law” implemented, the Board of Supervisors play a
larger role in corporate governance.
In summary, research on effectiveness of the
Board of Supervisors has not yet formed a clear and
consistent conclusion, previous studies mainly
focused on the discussion of the relationship between
general characteristics of the Board of Supervisors
and its financial supervision effect. This paper
focused on the individual characteristics of
Supervisory Board members, tested its members’
impacts on the supervision function. Through manual
collection of personal traits of the members of
Supervisory Board, this paper tested the influence of
their age, gender, degree, financial and banking
background on the level of earnings management,
provided an important and useful perspective for the
existing controversy about the effects of the Board of
Supervisors.
3 RESEARCH DESIGN
3.1 Samples Selection
In this paper, we selected Shanghai and Shenzhen
stock exchange listed companies in China as samples,
the research time interval was 2007-2012. Data from
CSMAR database, background characteristics of
members of the Board of Supervisors mainly based
on the manual screening to resumes in CSMAR
database. In this paper, I excluded financial,
insurance companies; companies with negative net
assets; companies listed less than one year;
companies without complete financial data and
finally got 9732 observations.
3.2 Variables Settings
3.2.1 The Dependent Variable
The dependent variable was the level of earnings
management (EM).In this paper, used the modified
Jones model (1995) to calculate discretionary
accruals, and then adopted its absolute value to
measure the level of earnings management.
3.2.2 The Independent Variables
AGE, it obtained by the average age of all the
members of the Supervisory Board of the company.
GEND, it obtained by the average data of all the
members of the Supervisory Board of the company.
Male take 0, female take 1.
DEGRE, it obtained by the average degree level. Less
than or equal to high school take 1; college take 2;
master take 3; doctor take 4.
FAB, it equalled to the number of supervisors having
the financial or auditing background divided by the
total number of supervisors.
BSB, it equalled to the number of supervisors having
a banking or securities background divided by the
total number of supervisors.
3.2.3 Control Variables
Reference existing research, this paper selected the
company assets (SIZE), financial leverage (LEV),
return on assets (ROA), firm growth (GROWTH),
loss situation (LOSS), audit firm rankings (BIG4), the
size of board of directors (BOARDSIZE), listed year
of the company (LISTAGE), the proportion of the
largest shareholder (GENT), actual controller (SOE),
industry and year as control variables.
Research on the Effectiveness of Financial Supervision of the Supervisory Board
423
Research on the Effectiveness of Financial Supervision of the Supervisory Board
423

Table 1: Descriptive statistics.
Variable N mean min P25 median P75 max sd
AGE 9732 46.3043 24.3333 42.93 46.5 50 66 5.2715
GEND 9732 0.2457 0 0 0.2 0.3333 1 0.2385
DEGRE 9732 2.1887 1 2 2.1667 2.4 4 0.3980
FAB 9732 0.2460 0 0 0.25 0.3333 1 0.2297
BSB 9732 0.0558 0 0 0 0 1 0.1402
3.3 Research Model
To examine the relationship between characteristics
of the Supervisory Board and level of earnings
management, a multiple regression model was
constructed as follows:
EM=α_0+α_1 AGE+α_2 GEND+α_3 DEGRE+α_4
FAB+α_5 BSB+CONTROL VARIABLES+ε
(1)
4 RESULTS
4.1 Descriptive Statistics
As can be seen from table 1, in the five variables on
behalf of supervisor features, the average age of the
members of the Board of Supervisors is about 46
years old; the mean of proportion of female
members of the Board of Supervisors is about 25%,
there are even companies are about 0%, suggesting
that the proportion of male and female supervisors
is uncoordinated ;the mean degree of the
supervisors is about 2, indicating degree of the
supervisors focused on college; the mean and
median of proportion of supervisors have a financial
background in sample firms is 24.6% and 25%
respectively, showing that Chinese listed companies
have realized that supervisors have background in
financial play a special role in financial supervision,
and hired them serve as supervisors; the proportion
of supervisors With banking background is 5.58%,
showing that compared with financial background,
the listed companies in China don't tend to hire
people have banking background as supervisors.
4.2 Regression Analysis
Table 2 reports the test result of the relationship
between characteristics of the Board of Supervisors
and the level earnings management( EM). (1)~ (5)
are regression equations in the presence of five
separate variables and control variables. (6) is the
regression equation including both all independent
variables and control variables. From table 2, there
are a significant negative correlation relationship
between the average age, average degree of
supervisors and level of earnings management,
indicating that the older and higher degree of
supervisors, the more constraints on the earnings
management behaviours of company. The
relationship between the proportion of banking
background of supervisors and earnings
management level is also significant, indicating that
the company is more likely to occur earnings
management behaviour with a larger proportion of
banking background of supervisors. The regression
coefficient of proportions of the members of
supervisors financial background and banking
background is negative, the reason may be that, our
Supervisory Board members are not entirely
composed by people independent and outside the
company, many supervisors of listed companies
include the head of company's accounting or
financial manager, etc..Because their independence
is difficult to guarantee as insiders, these internal
financial or banking experts may be constrained to
exert.
5 CONCLUSION
This paper studied the relationship between age,
gender, degree, financial and banking background
of the members of the Board of Supervisors and the
earnings management of listed companies in our
country. The research results show that the age of
the supervisory board members and the company's
earnings quality is significantly related. The older
the supervisors, the bigger likelihood to inhibit
earnings management behaviour of listed
companies. Degree and level of earnings
management are negatively correlated, suggesting
that supervisors with higher degree has higher
comprehensive qualities, have better ability to
perform financial supervision function. At the same
time, banking background of supervisors is
positively related to the company's earnings
management, showing the professionalism of
supervisors is limited in raising the quality of
earnings management. The sex and financial
background of supervisors has not a significant
influence on the earnings quality of listed compa-
ISME 2015 - Information Science and Management Engineering III
424
ISME 2015 - International Conference on Information System and Management Engineering
424

Table 2: Characteristics of Supervisory and Earnings Management.
EM (1) (2) (3) (4) (5) (6)
AGE -0.000 -0.000
(-2.20)** (-1.90)*
GEBD 0.005 0.004
(1.63) (1.09)
DEGRE -0.004 -0.006
(-2.29)** (-2.95)***
FAB 0.005 0.003
(1.60) (1.05)
BSB 0.013 0.015
(2.23)** (2.39)**
SIZE -0.004 -0.004 -0.004 -0.005 -0.004 -0.004
(-5.09)*** (-5.20)*** (-5.13)*** (-5.35)*** (-5.28)*** (-4.72)***
LEV 0.032 0.032 0.033 0.032 0.033 0.033
(6.60)*** (6.71)*** (6.75)*** (6.62)*** (6.82)*** (6.74)***
ROA 0.167 0.168 0.170 0.168 0.170 0.171
(7.42)*** (7.47)*** (7.52)*** (7.44)*** (7.55)*** (7.58)***
LOSS 0.035 0.036 0.036 0.035 0.036 0.036
(10.78)*** (10.79)*** (10.79)*** (10.76)*** (10.81)*** (10.89)***
BIG4 -0.003 -0.003 -0.002 -0.003 -0.003 -0.003
(-1.49) (-1.60) (-1.43) (-1.55) (-1.69)* (-1.49)
GENT 0.016 0.015 0.015 0.015 0.015 0.016
(2.85)*** (2.75)*** (2.79)*** (2.74)*** (2.79)*** (2.86)***
LISTAGE 0.000 0.000 0.000 0.000 0.000 0.000
(0.72) (0.41) (0.67) (0.45) (0.26) (0.71)
BOARDSIZE -0.001 -0.001 -0.001 -0.001 -0.001 -0.001
(-2.33)** (-2.38)** (-2.45)** (-2.45)** (-2.55)** (-2.42)**
GROWTH 0.021 0.022 0.022 0.022 0.021 0.021
(11.15)*** (11.24)*** (11.27)*** (11.23)*** (11.16)*** (11.10)***
SOE -0.008 -0.009 -0.008 -0.009 -0.009 -0.007
(-4.41)*** (-4.73)*** (-4.58)*** (-5.00)*** (-4.71)*** (-3.84)***
YEAR yes yes yes yes yes yes
INDUSTRY yes yes yes yes yes yes
_CONS 0.162 0.149 0.157 0.152 0.151 0.164
(7.98)*** (7.48)*** (7.92)*** (7.70)*** (7.65)*** (7.92)***
N 9732 9732 9732 9732 9732 9732
adj. R
2
0.171 0.171 0.171 0.171 0.172 0.173
F 30.195 30.209 30.334 30.150 30.371 27.751
nies. Thus, the effectiveness of Board of
Supervisors in financial supervision is limited to a
certain extent, but the Board of Supervisors still
plays an indispensable role.
REFERENCE
Jia C, Ding S, Li Y, et al. 2009.Fraud, enforcement action,
and the role of corporate governance: Evidence from
China. Journal of Business Ethics, 90(4): 561-576.
Hu H W, Tam O K, Tan M G S.2010. Internal governance
mechanisms and firm performance in China. Asia
Pacific Journal of Management, 27(4): 727-749.
Sun Jingshui, Sun Jinxiu.2005. Empirical study of
supervisory board and corporate performance of listed
companies in china(in Chinese). Statistics and
Decision, (2): 64-65.
Liu Shanmin. 2008. Empirical research between
independence and oversight functions of supervisory
board (in Chinese). Macroeconomics, (8): 48-52.
Li Lijun,Jin Yuna. 2010. Quartet control checks and
balances, free cash flow and over-investment (in
Chinese).Management Review, 22(2): 103-108.
Hu Haichuan, Zhang Xinling. 2013. Relation of corporate
governance and information disclosure quality (in
Chinese).Statistics and Decision, (22): 182-185.
Firth M, Fung P M Y, Rui O M. 2007. Ownership, two-tier
board structure, and the informativeness of earnings–
Research on the Effectiveness of Financial Supervision of the Supervisory Board
425
Research on the Effectiveness of Financial Supervision of the Supervisory Board
425

Evidence from China[J]. Journal of accounting and
public policy, 26(4): 463-496.
Li Weian, Hao Chen. 2006. Empirical Study of Chinese
Listed Company Supervisory Board Governance(in
Chinese).journal of Shanghai University of Finance
and Economics, 8(3): 78-84.
Wang Shuhu,Tong Ning,Zhou Zhao.2009. Empirical
research of supervisory board governance of listed
companies(in Chinese). Journal of Hebei University,
(4): 61-65.
Dechow P M, Sloan R G, Sweeney A P.1996. Causes and
consequences of earnings manipulation: An analysis
of firms subject to enforcement actions by the sec.
Contemporary accounting research, 13(1): 1-36.
ISME 2015 - Information Science and Management Engineering III
426
ISME 2015 - International Conference on Information System and Management Engineering
426