The Empirical Study Of The Quality Of Internal Control Information Disclosure On Earnings Management

With so many domestic and foreign financial fraud cases happening, people begin topay more and more attention to the construction of the internal control system ofenterprises. The rational design and effective implementation of internal control can makeenterprises’ assets intact, business legitimate and financial reports authentic. Meanwhile,the information disclosure of enterprises’ internal control is able to make the users ofexternal information fully understand the business activities of enterprises and theauthenticity of surplus and it is also convenient for the public to supervise it. The regulardisclosure of enterprises’ internal control activities helps to protect the interests ofinvestors and creditors. Researches show that high quality companies prefer to disclose theinformation of internal control in detail, which transfers a good signal to the market of arelatively low degree of company’s earnings management. The study of the relationshipbetween the information disclosure of internal control and earnings management is usuallymeasured by the disclosure of the evaluation report of internal control and the audit reportof internal control in most articles. However, in order to measure the quality of informationdisclosure of internal control and to study the relationship between the informationdisclosure quality of the internal control and earnings management, this paper tends tojudge the defects of the companies’ internal control and the construction of the internalcontrol evaluation system from a new angle.Firstly, this article analyzes the internal control information disclosure which isrelated to earnings management’s research background, significance, research ideas and soon. Secondly, this article finds the point of penetration on base of teasing out the literaturesat home and abroad. Thirdly, this article analyzes the influence of information disclosure ofinternal control on earnings management and the reasons from the principal-agent theory,asymmetric information theory, signal transmission theory to generate a hypothesisaccording to the correlation analysis. Lastly, this article verifies the hypothesis and putsforward some countermeasures and suggestions through empirical. In the empirical part,this article regards the A shares of manufacturing offered in Shenzhen from2011-2012asthe research sample, which analyzes from three aspects: the disclosure of internal controlaudit report, the disclosure of internal control deficiencies, the disclosure of internal control information disclosure index to measure the quality of information disclosure ofinternal control. And then, this article studies the quality of information disclosure ofinternal control on the impact of earnings management through the method of acombination of normative and empirical, a combination of qualitative and quantitative andthe amalgamation of subjective and objective. This article utilizes the defective signs of theinternal control to measure internal control deficiencies, internal control evaluation systemto measure the internal control information disclosure index, the modified Jones model tomeasure earnings management, as well as, this article builds model to make descriptivestatistical, correlation test and regression analysis, which concludes that internal controlinformation disclosure quality is negatively correlated with earnings management.Furthermore, this article uses the basic Jones model to measure earnings management anddoes robust tests about it, the conclusion stands still significantly. In the end, to restrain theearnings management behavior of enterprises, we advise that the enterprises shouldstrengthen the awareness of the disclosure of the internal control information, norm thescope of information disclosure of internal control standard, make disclosure of internalcontrol defects standard, regularize the whole content of internal control evaluation report,intensify the supervision of listing Corporation’s internal control construction etc.