Study On The Auditing Quality Of Internal Controls And Earning Quality

The aim of the internal control in an enterprise is not only to ensurethe truthfulness of the information on the accounting earning, but alsoimprove the efficiency and the effect of the working. By virtue of theirasymmetrical access to the information, the investors outside of theenterprise thus are not sufficiently acquainted with the practice of theinternal control, which results in the requirement that a third party use itsauditing behaviors such as auditing the reports on internal control asmeans to give advice to the investors knowing about the internalmanagement and controls of the enterprise to reduce the decision-makingrisk. The main aim of this article is to discuss whether internal controlauditing can have an effect on improving the earning quality and toprovide the basis on proving he auditing quality of internal controls andthe earning management on listed company in China by the way ofstudying the correlation between the auditing quality of internal controlsand earning quality.In the first part of the article, the author, on the ground of reviewingthe historic document about the internal control auditing and earningmanagement domestic and overseas, summarize the research result on therelationship between them and then lead to the start point and researchaim of the article. The second part of the article, the author analyzes thecorrelation between the auditing quality of the internal control and the earning quality and present the two supposes by expounding the twoconcepts of auditing quality of the internal control and the earning quality.On the stage of study designing, employing for references the results ofrelated studies on the measurement of earning management and those onthe estimation of the explanatory ability of models of various kinds, theauthor takes the section modified Jones Model regressed by annual as themeasurement model of earning quality.In the part of empirical analysis, the auditing fees and theaccounting firm size, which are the substitutes variables of auditingquality of internal controls, are used as the independent variables, andthe earning quality as the dependent variable, To control the factorswhich would had an effect on the auditing quality of internal controlsand earning quality, the author constructed two regression modelsadding the controlled variable. Then, under certain selected conditions,the cross-sectional data of2010and2011collected from126listedcompanies in Shenzhen Stock Exchange are used as the total sample,and single variable T-Test, Pearson Correlation Test and multi-regressionanalysis are adopted to do a thorough research on the correlationbetween the auditing quality of internal controls and earningquality.The results of this study indicate that the earning management oflisting corporations audited by top-ten accounting firm is higher in degree than that in those audited by non-top-ten accounting firm, that is, thecorrelation between the earning quality of a listed company and the sizeof the accounting firm is positive; while the higher the auditing fee of alisted company is, the higher is the degree of its earning quality, that is,the correlation between the earning quality and the auditing fees isnegative.In the last part, the author in this article, based on the results oftheoretical and empirical studies, puts forward two-sided suggestionsabout enhancing the auditing quality of internal controls and completingthe company interior governance structure to enhance the earning qualityof listed companies.