Managerial Power,Internal Control And Earning Quality

In 2002, the Enron Incident stroke the US as well as the entire world, subsequently, a series of company scandals drew public attention to company management, in light of which, the US congress then passed the Sarbanes-Oxley Act. According to Clause 302 and Clause 404 of the act, the senior management of the company should reveal the major deficiencies of internal control that existed in the company and disclose the selfassessment report on internal control audited by CPA, in order to ensure the validity of the internal control. It is thus clear that internal control plays a rather significant role in company management. One of the three objectives of internal control that the COSO report presented is to reasonably guarantee the reliability of financial reporting, and the reliability of financial information will affect investors’ decision-making in a large extent, thereby determine whether the capital market can have a healthy development. Different sectors of the society have gradually realized the internal control’s functions to inhibit earnings management of the managers and to improve the quality of financial information, especially with the occurrence of financial fraud cases such as Enron and WorldCom.In addition, internal control system is an institutional guarantee which is composed of managers, formulated by the board of directors. In a certain extent, it reflects the wills and intentions of the management. For each sector below the senior executives, senior executives are entrusted, so they will make the system itself as scientific as possible and ensure its implementation via powerful means. Executives, often take constraints from the implementation of the system on their behaviors into fully consideration when designing the internal control, especially those in large enterprises. But even in the presence of a good internal control system, due to incompatible incentives, asymmetric information and other reasons, the management with excessive power may also weaken the monitoring function of the board of directors, thus make internal control framework a mere figurehead for private gains. It is clear that managerial power will affect the effectiveness of internal control in a great extent.Based on research samples of A-share Companies listed in Shenzhen Stock Exchange from 2009 to 2013, this paper raises empirical analysis about the correlation of the internal control quality and earnings quality. The study finds that after controlling some inherent features and key variables of the companies, earnings quality is higher when the quality of internal control is higher. On that basis, this paper introduces the management power as a new perspective and divides the management authority into four dimensions, namely managerial organization power, ownership rights, expert power and prestige power. Then we study the effect the four dimensions of the managerial power have on the relationship between internal control and earnings quality respectively.The results of the study show that the higher the quality of internal control, the higher earnings quality will be, and the positive relationship between the two is very significant. Good internal control can reduce the scope of manipulation of earnings management, improve the quality of information disclosure of internal control, and correct the inappropriate accounting treatment and accounting error, which is conducive to the improvement of earnings quality. At the same time, the results of the study also finds that the relationship between internal control and earnings quality is influenced by managerial power. While the board chairman and the general manager are two separate positions, there is a significantly positive correlation between internal control and earnings quality, however, when two positions unite as one, internal control and earnings quality has no significant correlation. In the group of managers with equity, there is a significantly positive correlation between internal control and earnings quality, but there is no such correlation between the two in the group where managers don’t hold equity. In the group of managers with high degrees, there is a significantly positive correlation between internal control and earnings quality, on the contrary, there is no significant correlation between them when managers do not have high education degrees. In the group of managers with a shorter term group, there is a significantly positive correlation between internal control and earnings quality, while the correlation between the two does not show in group of general managers with longer term.Based on what have been studied above, we put forward the following corresponding policy recommendations. Firstly, pay attention to the internal control construction and optimize the environment of internal control. Secondly, strengthen the internal governance and improve the structure of managerial power mainly from four aspects. First, constraint management structural power, Second, improve the incentive mechanism of the general manager, Third, appropriately increase the proportion of highly educated managers, Fourth, pay more attention to the supervision and inspection of a longer term management. The policy suggestions above have a great policy implications for follow-up construction of internal control and the improvement of the structure of listed companies.