Empirical Research On The Relation Between Internal Control And Earnings Management Of China’s Listed Companies

Modern business is contract management model. As shareholders as the funderis principals and managers are agents, managers make operating decisions ofenterprises matters, and have a responsibility to the client. their business decisionsdirectly affect the economic interests of the client. The information asymmetrybetween the internal and external information users provide a secret to space foroperators. To seek short-term interests, operators adjust the financial statements ofthe enterprise or make false trading operations, idirectly affecting the long-terminterests of shareholders and resulting in decreased quality of the information.How to enhance corporate’s information disclosure quality and how to restrainearnings management of listed company operation, has become a top priority. Inrecent years, China has made great efforts in internal control system, In2010promulgated the "Enterprise Internal Control Application Guide No.1-organizational framework" and other normative. To a certain extent, theimprovement of the internal control system can regulate the behavior of managers,and also increased the information disclosure quality of listed companies as a whole.However, in this regime there are still a variety of circumvent means. Someenterprises’ disclosured information quality is still not optimistic. Therefore, theresearch on the influence of internal control quality to earnings management,analysis on the effect of quality of internal control to which earnings management,and proposing appropriate policy measures are a serious problem.In this paper, it take1616companies listed on Shanghai and Shenzhenmotherboard as a research object in2011. It uses whether voluntarily disclosureinternal control attestation report and whether disclosure a reasonable guarantee ofinternal control attestation report as explanatory variables, uses accounting choiceearnings management activities measuring by Jones model, real activities earningsmanagement (handling cash flow, maneuverability deliberate production cost,handling fee) as explained variables, uses operating cycle, firm size, earnings pershare, etc., as control variables, and finally builds a regression model about therelationship between internal control quality and earnings management. By use ofEXCEL and SPSS17.0software, we conducte descriptive analysis, the linearanalysis, and regression analysis on the sample data. Finally, the conclusion is thatinternal controls quality and accounting choices earnings management has anegative correlation, and internal controls quality and the real earnings managementactivities is not relevant.According to empirical results, the main reasons analyzed is that the internal control system is not perfect. While improving the quality of internal controls has agood selection inhibition on accounting earnings management，but it can not toavoid off-balance operation of enterprises in a timely manner, resulting that realearnings management activities have operational space with a strong secrecy.Therefore we proposed some policy recommendations,such as establishing aexternal supervision system, improving financial laws and regulations, completingthe internal control system, optimizing the structure and size of the Board,accelerating sales cycles and consummating compensation management system.