An Empirical Research Of Relationship Between Internal Control Quality And Earnings Management

Financial reporting informations are affected by earnings management.Their reliability and relevance decline seriously, investors and other information users are misleaded.Internal controls as an important institutional arrangement to ensure the quality of financial reporting,is highly regarded by regulators and investors. In the context of our current system, can internal control decrease earnings management? This article will make an empirical research of the relationship between the quality of internal control and earnings management.We examine the relation between the quality of internal control and earnings management using 1625 non-financial public corporations from 2007 to 2008. We measure the quality of internal control using the disclosement of the internal control self-assessment reports.Earnings management is measured using discretionary accruals computed by cross-section modified Jones model.The first step,we find there is no significant correlation between the quality of internal control and earnings management in the full samples. Furthermore, we divide the samples into two groups according to the direction of earnings management.Regardless of whether earning management is positive or negative,we find there is no significant correlation between them. As the quality of internal control is affected by the corporate governance structure,we make the further analysis of the relationship between the quality of internal control and earnings management under different governance structure. We use the nature of ultimate controller,ownership structure, board characteristics, board of supervisors characteristics to describe the corporate governance structure.We divide the samples into groups according to variables of the corporate governance structure characteristics.The results show that internal control and earnings management is still no significant correlation. Although internal controls under different governance structure make different influence to earnings management, the difference is not significant. In summary, the internal control quality of chinese public corporations too low to restrain earnings management effectively.