Internal Control Quality, Real Earnings Management And Audit Fees

An economic bridge between the audited firm entity and the accounting firm, justifiable and regulative audit fees play an important role for the healthy development of the audit market. Internal control quality is the important factor that affects audit fees. High quality of the internal control has certain inhibitory effect for the the entity’s earnings management behavior. In this paper,we utilize empirical research methods. By using data of A shares from listed companies on the stock market of Shanghai and Shenzhen during 2007 to 2013 as example. We empirically examine the effects of internal control quality and real earnings management on audit fees.There are five chapters in this paper. Chapter 1 is introduction. Chapter 2 is a review of the literature, where we categorize the research of internal control quality and audit fees, earnings management and audit fees, internal control quality and earnings management, factors of audit fees at home and abroad. Chapter 3 introduces theoretical analysis and research hypothesis. The hypothesis is underpinned by the theoretically analyzing the system background of audit fees, the relative theories of real earning management, agency theory, information asymmetry theory and signaling theory. Chapter 4 is the study design, where we introduce the sample selection and describes the data sources, variable definitions and research model. Chapter 5 makes an empirical test on the hypothesis proposed in this paper. Finally, it concludes the dissertation by stating its research conclusions, discussing its limitations and highlighting several issues for future research.The major conclusions of the dissertation are as follows:1.There is an insignificant negative correlation between internal control quality and audit fees. In this paper, we use the disclosure of internal control weakness and internal control material weakness as the substitute variable of internal control quality, they get the same conclusion:the higher of internal control, the lower of the audit fee.2.The degree of real earnings management is higher, audit fees will also be much higher. The enterprises adopt sales manipulation, reduction of discretionary expenditures and overproduction to earning management. There is an insignificant positive correlation between real earnings management and audit fees.3.In the case of high quality internal control, the higher the degree of real earnings management, the higher audit fee,there is no insignificant positive correlation between accrual earnings management and audit fees. In the case of high quality internal control, there is no insignificant positive correlation between real earnings management and audit fees, but the higher the degree of accrual earnings management, the higher audit fees.