Internal Control, Independent Auditing And Earnings Management Through Real Activities

All always, governance mechanisms of earnings management of the listed company, are core content of accounting supervision. For governance of earnings management, internal control and independent auditing are two important safeguard mechanism of the quality of accounting information. Internal control and independent auditing constitute a system of monitoring the quality of accounting earnings information from both internal and external orientation.Based on this, the article first elaborated internal control and independent auditing’s the effect on earnings management; then, based on the idea of game theory, theoretically analyze the interaction of the internal control and independent auditing in earnings management governance. Finally, made use of the2011annual A-share listed companies as research samples, the paper makes a empirical investigation of earnings management through real activities, and verified the relationship between internal control, independent auditing and the real activities earnings management. The study showed that there is a significant negative correlation between the listed company’s quality of internal control and its degree of earnings management; there is a significant negative correlation between the quality of independent auditing and extent of earnings management, too. However, with the improvement of the quality of internal controls, there is a significant reduction in the likelihood of independent auditors discover and suppress the earnings management. In summary, internal control and independent auditing system make a coupling effect, namely alternative and complementary role, on earnings management governance.The conclusions of the article already provides a theoretical support for efficient recognition and governance the earnings management of listed company. At the same time, the conclusions also warns regulatory agencies to effectively integrate the diversified mechanisms to establish and improve multi-faceted, three-dimensional systems of earnings management governance.