An Analysis Of The Relationship Between The Internal Audit Level And Earnings Quality

Corporate management structure is the key of modern corporate regime, auditplays an important role of effective corporate management. The failure of corporatemanagement is the source of a series of accounting fraud since21stcentury. The Enronscandal and WorldCom events cause the world to pay attention to corporatemanagement, internal control and internal audit, especially the action that internalauditor Cynthia Cooper uncovered the WorldCom accounting fraud, it made thefunction of internal control be identified. As the importance of internal control improved,the Institute of Internal Auditors (IIA) and American Stock Exchange (AMEX) hasrevised and completed the regulators of internal control constantly. According to “amodel of corporate governance” put forth by IIA in April2002, an effective internalaudit function is one of four cornerstones of corporate governance, along with the auditcommittee of the board of directors, executive management, and the external auditor. InAugust2002, AMEX required all the films to set an internal audit department. After theSOX issued, the function of internal control was more obvious regarding monitoring,serving, governing and so on. In addition, AICPA has highlighted the relationshipbetween internal audit and financial statements.In China, the important role that the internal audit plays in enterprise has beengiven the attention of the supervision department. The China Securities RegulatoryCommission requires public companies to set up the internal audit department.According to “the provisions of internal audit work” put forth by the National AuditOffice in2003, the state organs, financial institutions, enterprises and organizations,social groups and other units, shall establish and improve internal audit system. Thismarks the internal audit is divorced from the national audit and has the independentstatus. The subsequent introductions of “Fundamental internal auditing standards”(2003),“Internal audit specific standards”(2003),“The basic standard for enterpriseinternal control”(2008) and “Supporting guidelines for enterprise internalcontrol”(2010), these provisions has been further enhanced the role and status of theinternal audit.The financial report is an important way to obtain enterprise information forinvestors, and it is also the main basis for investors to make investment decisions. Asthe information asymmetry exists between the outside investors and the enterprisemanagement, and also between the enterprise owners and managers, it provides the possibility for managers to distort financial report information, which leads to adecrease in earnings quality of financial report. The earnings quality is closely related tocorporate governance, previous studies have shown that the positive relationshipbetween corporate governance and earnings quality, Sound corporate governancestructure helps to improve the earnings quality of financial reporting. The goal ofcorporate governance is to ensure the coordinated development among all stakeholders’benefit, and to ensure Incentives and counterbalance between interest groups. Whileinternal audit is an important part to improve the corporate governance structure, thenature of its goal is consistent with the purpose of corporate governance, it is a systemwhich can evaluate, supervise and control corporate governance effectively. Theeffectiveness of internal audit is to ensure smooth operation of corporate governance.Then whether the positive role of internal audit plays in corporate governance willproduce certain effect to improve earnings quality or not, it is caused by more and morewidespread concern and attention of the theoretical and practical circles.Based on the above analysis, this article selects internal audit level as the researchsubject; this is mainly because of considering the internal audit plays an important rolein corporate governance and the lack of relevant empirical research. Based on thetheoretical analysis of the relationship between internal audit level and earnings quality,this paper takes Shenzhen A-share listed companies from2007to2011as researchsample, using the empirical method to examine the relationship between internal auditlevel and earnings quality. And we find that when the internal audit level is high, it caneffectively inhibit the managers carry on earnings Management through the way ofmanipulate profits, thus it will improve the reporting earnings quality, that the internalaudit level and earnings quality is positively correlated. In addition, this paper examinesthe relationship between internal audit level and earnings quality under the condition ofownership concentration. We divide the sample into two groups according to thecondition that whether the largest shareholder proportion is as high as50%. When thelargest shareholder holds more than50%shares in a company, he is in a position ofabsolute control, namely the ownership is highly concentrated. The results show that theinternal audit level and earnings quality have no significant correlation for the listedcompanies that highly concentrated ownership and have a significant positivecorrelation for the listed companies that the largest shareholder holdings is less than50%. At the same time, this paper also examines the relationship between internal auditlevel and earnings quality under the condition of board leadership structure. The results show that the internal audit level and earnings quality have no significant correlation forthe listed companies that the chairman and general manager is the same person and havea significant positive correlation for the listed companies that the chairman and generalmanager is not the same person.In this paper, the significance of studying the relationship between the internalaudit level and earnings quality is: first, based on the results of previous studies and thedata availability, it is the first time to use five indicators to synthetic internal audit leveland to measure the level of internal audit in our country, in order to multi-level andmulti-angle comprehensive to quantify the level of internal audit, to enrich the contentof internal audit level and reveal the relationship between the level of internal audit andearnings quality, and hope to provide empirical evidence for our internal audit andearnings quality empirical research this poor areas; second, according to the nationalconditions and the development of internal audit in our country, some problems of theinternal audit work in our country are analyzed and Suggestions are put forward, inorder to make a contribution to the improvement of the internal audit of the listedcompanies in China.