A Empirical Study Of The Relationship Between Internal Control Report And Accounting Information Quality

In recent years, financial fraud scandal emerge in endlessly, it is inseparable with the status of enterprise’s status. Thus, all countries pay more attention to the importance of internal control. Since COSO Report make a clear definition of internal control, Sox Act also specifically require listed companies to disclose Self-evaluation Report on internal control and Attestation Report on internal control, countries enact various laws and regulations to improve the mandatory disclosure of internal control.Since 2006, China require listed companies to disclose information about its internal control while disclose the annual report. But most of the listed companies doesn’t separately disclose the self-evaluation report in standard form, they just add information about the construction and implementation of internal control system in the part of annual report about corporate governance.In June 28,2008, Ministry of Finance, Securities and Futures Commission, the Audit Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission jointly promulgated the "Basic Standard for Enterprise Internal Control". The norms define" the listed companies that carry out the standards have to disclose the annual self-evaluation report, and they can employ the securities and futures qualified accounting firm to audit the effectiveness of internal control."In April 26,2010, five ministries jointly promulgated "Guidelines on internal control", including application guidelines, assessment guidelines and auditing guidelines. Three guidelines specified issues related to internal control. Application guidelines regulated how to establish and improve the internal control system; Assessment guidelines regulated self-evaluation report on internal control; Auditing guidelines regulated that companies hire firms for the effectiveness of internal control.The promulgation of these regulations mark that the system of internal control, which integrating advanced experience with Chinese characteristics, has been completed. The conformation of system of internal control has an important meaning for improving the quality of internal control, and the quality of internal control plays important roles on improving the quality of accounting information protecting the safety of property、reducing financial fraud and improving the risk prevention capability. This article studies the relationship between the disclosure of internal control report and the quality of accounting information in the context of China. Thus the internal control evaluation and verification has just begun, this article makes up the weaknesses that recent research lacks empirical research.Based on the guidelines of the new standards, the article studies on the concept of report on internal control, its significance, current situation.The article puts forward the related measures in order to improve the current disclosure situation of internal control report of listed companies. Besides, it provides references for the management practices of internal control.First, by analyzing the current disclosure situation of internal control report in Chinese listed company and statistical analysis of selected samples, it provides the problems and its reasons:1. although all the sample units have disclosed self-evaluation report on internal control, some reports are very simple and doesn’t disclose according to 5 elements of internal control; 2. while all units have disclosed self-evaluation report on internal control, but there are some units did not disclose the attestation report on internal control; 3. the objects of attestation report are not uniform; 4. the permissions of attestation report have not been clearly defined.Second, the article makes a thorough review of research achievements at home and abroad. From the research, we can find that most of the research focus on the self-evaluation report recently, because it is compulsory. However, the recent research is still in the stage of exploration, the angle of study is relatively scattered, this is because self-evaluation reports’contents、methods and standards etc have not yet formed a mature theoretical system. In addition, most of the current study is based on the theoretical analysis, the empirical research are too few to support the theory with data. The research on attestation report is very few because it is not mandatory, but with the promulgation of "Guidelines on internal control"(the guidelines called for the listed companies must disclose self-evaluation report and the attestation report), the research articles will be more and more.Third, after theoretical analysis of internal control report and accounting information quality, the article promotes two hypotheses:one is the disclosure of internal control report has positive correlations with accounting conservatism, one is the disclosure of internal control report has positive correlations with earnings quality.Then the article begins the empirical analysis. In Dec.2008, Shanghai Stock Exchange issued the notice—《On efforts to listed companies to fulfill their social responsibility reporting and internal control self-assessment disclosure reporting in 2008》, in this notice, it requires 269 companies, including "SSE Corporate Governance section" sample companies, distribution companies overseas listed foreign shares and financial companies, must disclose both the Annual Report 2008 and the internal control self-assessment report. Thus, the author select companies in "SSE Corporate Governance section", reject the incomplete data, the final sample is 232 companies. By analyzing the characteristics of the internal control report, it indentifies four key elements in order to get the ICI index. Four key elements are:content of the report, the object of the attestation report, the type of the attestation opinions and the size of the accounting firm that issue the attestation report.Currently, both the standard-setting bodies, theorists or practitioners do not have a unified conclusion on what features do the quality of accounting information have. But they all view the reliability and relevance as the main qualitative characteristics of accounting information.Reliability is a general quality characteristics, it is based on reflect the real financial situation objectively, and make guarantees for the information users by means of measurement and inspections:enterprises are really based on actual transactions or events to complete the accounting process. Accounting staff deal with accounting information impartially in every aspect, and stay subjective in every aspect, in order to ensure the accounting information is reliable.-Different users of accounting information have different requirements, so the relevance depend on decision-makers’different requirements of accounting information. Relevance asks for that the information provided by enterprises should be relevant to the creditors and investors’decision-making, this can help them evaluate past and present situation and make predictions for the future development.Accounting information quality depends on trade-offs of the reliability and relevance. Conservatism principle requires that in making accounting estimate, enterprises should neither exaggerate the assets、income and reduce liabilities、costs.Therefore, as a reporting mechanism, conservatism can limit the abuse and over-earnings, thereby improve the quality of accounting information. Conservatism principle requires that when confirm the profit, it needs a higher degree of reliability. Because the relevance asks that the information should public timely, conservatism asks for confirmation of losses timely and deferred unrealized losses, so conservatism principle reflected the reliability while fixed relevance, thus make two principles into consideration. So this paper selects accounting conservatism as a feature to measure the quality of accounting information.Many scholars only study one aspect of accounting information, but some simply use earnings to replace accounting information in empirical research. Although these practices can not fully reveal the features of accounting information, grasp the main factors is also feasible. Earnings quality is the typical representative of accounting information、accounting recognition and measurement. It is also the most important information that investors concerned. Therefore, this paper selects earnings quality as a feature to measure the quality of accounting information.In the measure of accounting information quality, the paper selects accounting conservatism model and modified Jones models, from the angle of prudence and earnings information, analyzes the listed company quality of accounting information. Then, this paper studies the relationship between the quality of internal control and quality of accounting information by means of empirical analysis.Last,this paper gives some advices on how to improve the internal control and draws the main conclusion based on research:first, enterprises should combine self -evaluation and external audit verification together, establishing multi-level evaluation system; second, improve the scope of the evaluation of internal control; third, take economic factors into consideration when evaluate the internal control; fourth, establish a complete and recognized standards of internal control as soon as possible; fifth, the regulatory authorities should strengthen supervision and inspection.Last, the paper points out the deficiencies. It also forecasts the future of this research.