The Empirical Research On Effect Of Internal Audit Quality On Earnings Management

Modern internal audit has developed quickly since it began in railways department of America in early20th century. Internal audit becomes the focus with the worldwide revolution of corporate governance because of Enron and WorldCom fraud. According to a model of corporate governance put forth by the Institute of Internal Auditors (IIA), the internal audit function (IAF) is one of four cornerstones of effective corporate governance, along with the board of directors, executive management, and the external auditor. For the first time, the internal audit was put on the level of company management. Since then, as one of the important aspects of company management, the internal audit has been put more and more attention by academia.This article also believes that one of the roles of internal auditing in the corporate governance is to improve the quality of financial reporting, ease the level of earnings management. This paper takes a method combining normative research and empirical analysis. It’s mainly a combination of principal-agent theory, contract theory, theory of asymmetric information, and other related knowledge, illustrating the interaction between earnings management and internal audit. This study contains five sections, starting from introducing the background of the research, through theoretical analysis and assumptions, and establishes a regression model, to verify the assumptions of it.This paper takes empirical analysis between internal audit quality and earnings management based on127samples from Shenzhen motherboard listed companies of A-share. The empirical results show that, there is a significant negative relationship between internal audit quality and the earnings management. In other words, the higher the quality of the internal audit, the lower the level of earnings management of the company. From the absolute value of the coefficient, the inhibitory effect on earnings management of internal audit is still relatively weak, which reveals that the corporate governance effect of internal audit has not been brought into full play and overall strength of internal auditing has to be raised. At the same time, the paper also establishes models for each part of the three aspects of internal audit quality.In addition, the paper makes a statistical analysis on reporting relationship, the number of personnel and work contents of internal audit. Based on the existing problems of internal audit, the paper put forward five proposals to promote the overall strength of the internal audit at the end of the article. This study has theoretical and practical significance, which reflects not only on providing new evidence of the relationship between internal audit and earnings management, but also on providing new ideas for the measurement of the internal audit quality.