The Empirical Research On The Relations Of Internal Supervision Quality And Earnings Management

With the development of market economy, the authenticity and reliability of financial information are required more and more. But a series of financial scandals appeared in recent years, which make the academia and the supervision department begin to set their sights on internal control. The United States Congress issued the SOX Act after the Enron events, and it made strict regulation about the listed companies’ internal control from the angle of supervision. To complete internal control of companies in our country, we also establish an internal control system containing construction, evaluation and audit. One of the goals of the internal control is reasonably guarantee that financial report and related information are genuine and believable, however the weakness in internal control influences the effectiveness of internal control. As an important element to ensure the effect of internal control, internal supervision can eventually serve internal control’s objectives. So, if the reliability of financial data is different due to different internal supervision quality? And whether high internal supervision quality can better inhibit earnings management?This paper mainly studies the relationship between internal supervision quality and earnings management. However, as a link of internal governance, the quality of internal supervision is difficult to directly judge. Therefore, a comprehensive evaluation index system is designed to evaluate internal supervision quality through theoretical analysis and lead to the calculation of the level of listed companies’ internal supervision quality. What’s more, this paper investigates the internal supervision function from the perspective of earnings management.In this paper, we theoretically analyze internal supervision can make internal control operate effectively through supervising control activities and improving other four elements of internal control, in order to inhibit earnings management. Then, we perpetrate statistical description of the disclosure conditions. Although at the present stage, China’s listed companies’disclosure of internal control information is becoming more and more standardized, most of the companies still don’t disclose internal supervision information in detail and its content of the disclosure is not uniform. So, the author screens A-share listed companies from2009to2011, and finally gets a total of1467samples of which internal supervision information is quite comprehensive for this research. Next, we introduce internal supervision quality to modified Jones model and Roychowdhury model of real activities earnings management, to test the influence of internal supervision quality upon two types of earnings management. Finally, we improve that internal supervision can really inhibit two types of earnings management, then we (?) the robustness test further and verify the reliability of the results. It implies that strengthening internal supervision is necessary and urgently.This study is helpful to clarify the relationship between internal supervision quality and earnings management, and also helpful to the improvement and perfection for internal supervision. Nevertheless, this empirical study of internal supervision is only a starting point for future empirical study, the research on internal supervision needs to be further expanded.