Abstract: Deeply implementing the innovation driven development strategy is the key to promoting Chinese path to modernization. Taking local state-owned listed companies as research objects, this paper conducts a quasi-natural experiment to explore the impact of the audit supervision of local audit institutions on the innovation ability of local state owned enterprises based on the human, financial and material management reform pilots of audit institutions below the provincial level. The findings show that the reform of personnel, financial and material management in audit institutions below the provincial level can significantly enhance the innovation capability of local state-owned enterprises. The impact mechanism test reveals that the reform can curb the short-sighted behaviors of local state-owned enterprise management and reduce rent-seeking activities of local state-owned enterprises. Therefore, the reform can improve the innovation capability of local state-owned enterprises. Further research has found that the reform has a more significant effect on improving the innovation capabilities of local state-owned enterprises in areas with high audit reform intensity, low institutional investor shareholding ratios, and low media supervision. Due to the reform, the innovation capability of local state-owned enterprises has been improved, allowing them to gain a competitive advantage in the market. Consequently, it is essential to establish and improve a long-term mechanism for the audit and supervision of state-owned capital, and continuously promote the reform of combining “active government” and “efficient market”.

Key words: national audit, the human, financial and material management reform of audit institutions below the provincial level, local state-owned enterprises, corporate innovation